Efficiency Wages with Endogenous Monitoring

In the standard efficiency wage model, the monitoring level chosen by firms is exogenous and observable. In this paper, the level of monitoring is endogenized-chosen by firms and unobserved by workers. As a result, firms have an incentive to decrease the monitoring of employees for any given beliefs among workers about the chosen level of monitoring. We show that sufficiently patient firms are able to retain some control over the monitoring level. We also show that high-tech firms monitor their workers more and demand a higher level of effort than do low-tech firms.