*Professor of Economics, Institute for Empirical Economic Research, University of Zurich, Blümlisalpstr. 10, 8006 Zurich, Switzerland. Research for this paper was undertaken while the author was Visiting Professor of Economics at the University of Chicao. I am grateful for helpful comments to Gary Becker, Iris Bohnet, Robert Cooter, William Dickens, Reiner Eichenberger, Klaus Foppa, Beat Gygi, Beat Heggli, Daniel Kahnemann, Hartmut Kliemt, Edward Lazear, Carmen Matutes, Margit Osterloh, Daniel Rubinfeld, Marc Ryser, Erich Schanze, Angel Serna, Wolfgang Stroebe, hannelore Weck-Hannemann, and Oliver Williamson. Financial Support is gratefully acknowledged to the Richard Büchner-Stiftung at the University of Zurich.
DOES MONITORING INCREASE WORK EFFORT? THE RIVALRY WITH TRUST AND LOYALTY
Version of Record online: 28 SEP 2007
Volume 31, Issue 4, pages 663–670, October 1993
How to Cite
FREY, B. S. (1993), DOES MONITORING INCREASE WORK EFFORT? THE RIVALRY WITH TRUST AND LOYALTY. Economic Inquiry, 31: 663–670. doi: 10.1111/j.1465-7295.1993.tb00897.x
- Issue online: 28 SEP 2007
- Version of Record online: 28 SEP 2007
Principal-agent theory suggests that tighter monitoring will raise an agent's work effort and will be applied provided that transaction costs are low. However, when a psychological contract exists between principals and agents, the agents perceive increased monitoring as an indication of distrust, and this induces them to reduce work effort. This “crowding out effect” is likely to dominate when the relationship between principals and agents is personal, while the “disciplining effect” is likely to dominate when the relationship is abstract, as in a competitive market setting. Empirical evidence from neighbouring sciences and from an econometric study supports this proposition.