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Mutual Monitoring versus Incentive Pay in Teams

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  • Radoslava Nikolova

    (Crest)

Abstract

In a principal - multi-agent relationship, we derive the optimal mutualmonitoring - incentive pay mix. When the agents are better informed about theireffort choices than the principal, and when their information is sufficiently"good" there is a substituability between those two modes of providingincentives. However we show that the optimal mix depends on agents' liabilitylimit. When it is sufficiently slack the principal uses stronger incentive pay andless mutual monitoring. We also derive the conditions for adoption of costlymutual monitoring technology.

Suggested Citation

  • Radoslava Nikolova, 2005. "Mutual Monitoring versus Incentive Pay in Teams," Working Papers 2005-39, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2005-39
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    References listed on IDEAS

    as
    1. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
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    4. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-190, March.
    5. Macho-Stadler, Ines & Perez-Castrillo, J. David, 1993. "Moral hazard with several agents : The gains from cooperation," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 73-100, March.
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