The incentive effects of monitoring under alternative compensation schemes

This paper examines the marginal incentive effect of monitoring under share and wage payment schemes, using various assumptions concerning the risk preferences of workers and the informational content of monitoring signals. The direction of this effect is shown to depend critically on the set of assumptions employed; furthermore, the conditions necessary to generate a positive response of labor effort to monitoring may be restrictive and intuitively unappealing. A positive incentive effect is most easily guaranteed (under both compensation schemes) if monitoring produces an accurate signal of effort with a probability which depends on the level of monitoring intensity. Implications for the argument that the problem of monitoring dictates efficient organizational form are briefly explored.