Optimal Work Effort and Monitoring Cost

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Using a simple job market equilibrium model we study the relationship between work effort and monitoring by firms. Some other determinants of work effort investigated include the educational level of the worker, the minimum or start-up salary as well as the economic conjuncture. As common logic dictates, optimal work effort increases with the amount of monitoring done by the employer. Quite contrary to common logic, though, we find that at the optimum employers observe and control good workers much more stringently and meticulously than poor workers. This is because under profit maximization most of the employer’s profit and surplus result from good workers and he risks losing a large amount of profit by not observing those. Managers monitor strictly more productive workers, fast learners and those starting at a higher autonomous level of monitoring, as those contribute more substantially to the firm’s profit.

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