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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 245:
Monitoring and Pay

Magnus Allgulin and Tore Ellingsen ()

Abstract: The shirking model of efficiency wages has been thought to imply that monitoring and pay are substitute instruments for motivating workers. We demonstrate that this result hinges critically on restrictive assumptions regarding workers' choice of effort - for example that there are only two possible effort levels. Under more reasonable assumptions, monitoring and pay are complementary instruments. Another result is that there is a non-monotonic relationship between the wage level and the workers' rents. Finally, much of the empirical literature on the monitoring-pay relationship is shown to be seriously misguided.

Keywords: Monitoring; efficiency wages; incentive pay.; (follow links to similar papers)

JEL-Codes: J31; J41; (follow links to similar papers)

24 pages, June 16, 1998, Revised November 22, 1999

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