Workplace surveillance, privacy protection, and efficiency wages

Consider an employer who wants her employee to work hard. As is well known from the e.ciency wage literature, the employer must pay the (wealth-constrained) employee a positive rent to provide incentives for exerting unobservable e.ort. Alternatively, the employer could make effort observable by costly workplace surveillance. It is argued that a privacy protection law preventing surveillance may increase the total surplus. While such a law reduces the employer’s profit, this loss can be overcompensated by the employee’s gain, because the employer invests in surveillance not only to implement higher effort, but also to reduce the employee’s rent.