Does Monitoring Decrease Work Effort? The Complementarity Between Agency and Crowding-Out Theories

Abstract

Agency theory assumes that tighter monitoring by the principal should motivate the agent to raise his effort level. In contrast, the “crowding-out” literature suggests that tighter monitoring may reduce the overall work effort. These two assertions are not necessarily contradictory provided that the nature of the employment relationship is taken into account (Frey 1993). This paper reports on the results of a real-effort laboratory experiment designed to test the relative importance of the disciplining effect and the crowding-out effect of monitoring. We find no strong support for the crowding-out hypothesis and we show that the disciplining effect of monitoring dominates in abstract one-shot relationships as well as in somewhat more interpersonal multi-shot relationships. Principals are not trustful enough to refrain from using the monitoring opportunity and most agents react to a decrease in the monitoring intensity by decreasing their effort.