Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 245: Monitoring and Pay

Magnus Allgulin and Tore Ellingsen ()
Additional contact information
Magnus Allgulin: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden
Tore Ellingsen: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

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.

JEL-codes: J31; J41

24 pages, First version: June 16, 1998. Revised: November 22, 1999.

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