The Value of Monitoring Risk Averse Agents in Teams

Vander Veen (1995) has argued that a principal has an incentive to monitor risk averse agents engaging in team production. We show that this result rests on specific informational assumptions that are not essential to team production. Moreover, under typical team environments and contract conditions there is no benefit from monitoring of individual agents, leaving only costs for the principal. We identify an additional mechanism design problem that arises in certain team settings-the principal must determine when to make information about each agent's reported ability public to the other team members.