Input, output or mixed monitoring in teams?

Abstract

In team problems is it better for the principal to reward players based on their individual efforts or should they be rewarded based on collective performance or even a combination of the two? The answer will depend on the importance of two familiar challenges in team works – coordination and free riding. With perfectly complementary efforts, free-riding incentives are absent, so the principal prefers output monitoring over input monitoring but sometimes both may be dominated by mixed-wage incentives. When efforts are perfect substitutes in production, either of the two polar mechanisms may dominate the other but sometimes mixed-wages may dominate both. For more general technologies only output and input monitoring mechanisms are compared. It is shown that when the team production technology is supermodular, coordination becomes the primary concern and monitoring agents through collective output is mostly the better protocol. On the other hand, if the technology is submodular, output monitoring encourages free riding and so input monitoring may be a more attractive alternative.