Formal versus informal monitoring in teams

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In this paper we analyze a principal's optimal monitoring strategies in a team environment. In doing so we study the interaction between formal monitoring and informal ( peer) monitoring. We show that if the technology satisfies complementarity, peer monitoring substitutes for the principal's monitoring. However, if the technology satisfies substitution, the principal's optimal monitoring is independent of the peer monitoring. We also show that if the technology satisfies complementarity, then the principal in the optimal contracts will monitor more closely than in the case of substitution.

Original languageAmerican English
Pages (from-to)27-44
Number of pages18
JournalAmerican Economic Journal: Microeconomics
Issue number2
StatePublished - 2015


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