Monitoring Team Members: Information Waste and the Transparency Trap

Abstract

In a model of moral hazard in teams, we demonstrate that firms' concerns about low trust among teammates can justify three common but otherwise puzzling patterns. First, firms predominantly employ individual performance bonuses, ignoring relevant information about team output (information waste). Second, firms monitor homogeneous teammates heterogeneously (targeted monitoring). Finally, competition for better contracts induces workers to engage in a self-defeating race toward higher effort transparency (transparency trap). Notably, the firm may be indifferent to or even benefit from trust concerns. The analysis hinges on a novel trade-off between classical information rents and strategic insurance rents emerging from trust concerns.