Monitoring In teams: A model and experiment on the central monitor hypothesis

Alchian and Demsetz’s (1972) influential explanation of the classical business firm argues that there is need for a concentrated residual claim in the hands of a central agent, to motivate the monitoring of workers. We model monitoring as a way to transform team production from a collective action dilemma with strong free riding incentives to a productivityenhancing opportunity with strong private marginal incentives to contribute effort. In an experiment, we have subjects experience team production without monitoring, team production with a central monitor, and team production with peer monitoring, then vote on whether to employ the central monitor, who gets to keep a fixed share of the team output, or to rely on peer monitoring, which entails a coordination or free riding problem. Our subjects usually prefer peer monitoring but they switch to the specialist when unable to successfully self-monitor. We provide evidence for situations in which team members resist the appointing of a central monitor and succeed in overcoming coordination and free riding problems as well as for a situation in which an Alchian-Demsetz-like firm “grows” in the laboratory. – monitoring ; team production ; free riding ; cooperation ; experiment