Mutual Monitoring versus Incentive Pay in Teams

In a principal - multi-agent relationship, we derive the optimal mutual monitoring - incentive pay mix. When agents are better informed about their effort choices than the principal, and when their information is suffciently "good" there is a substituability between those two modes of providing incentives. However the optimal mix will depend on the liability limit of the agents. Thus when it is suffciently slack the principal uses stronger incentive pay and less mutual monitoring. We derive the conditions for the adoption of costly supervisory technology. We finish by comparing two possible organizational structures: delegation with unilateral supervision versus mutual monitoring.