Non-monitoring Monitoring in Teams

Abstract

We study how a principal incentivizes team production using the mere possibility of costly peer monitoring. The principal offers wages and free-rider reporting bonuses, both payable only upon team success. By promising large reporting bonuses, agents’ incentives shift: anticipating others’ shirking no longer leads to shirking, but to working and monitoring peers. Shirking is thus deterred ex ante, and equilibrium involves no actual monitoring. Unlike hierarchical schemes relying on strategic rents (Winter, 2004), our mechanism uniquely implements full effort without rents, at the same cost as partial implementation. This highlights the preventive role of off-path contractual clauses under limited liability.