OPTIMAL-CONTRACTS FOR TEAMS - A NOTE ON THE RESULTS OF MCAFEE AND MCMILLAN

In a team subject to adverse selection and moral hazard, McAfee and McMillan found in their 1991 paper, surprisingly, that under certain conditions, the outcome is unaffected whether the principal observes only total output or whether the principal can observe each person's individual contribution to the production of the output. This leads McAfee and McMillan to conclude that the purpose of monitoring is to discipline the monitor. However, when team members are risk averse, the principal can benefit by monitoring.