revised version published in: Games and Economic Behavior, 2008, 63 (1), 56-76.
Agency theory assumes that tighter monitoring by the principal should motivate the agent to
raise his effort level whereas the “crowding-out” literature suggests that it 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). Based upon a realtask
laboratory experiment, our results show that principals are not trustful enough to refrain
from monitoring the agents, and most of the agents react to the disciplining effect of
monitoring. However we find also some evidence that intrinsic motivation is crowded out
when monitoring is above a certain threshold. We identify that both interpersonal
principal/agent links and concerns for the distribution of output payoff are important for the
emergence of this crowding out effect.
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