Monitoring and pay

The shirking model of efficiency wages has been thought to imply that monitoring and pay are substitute instruments for motivating workers. We demonstrate that this result is not generally true. As monitoring becomes cheaper, a given effort level will be implemented with more monitoring and less pay, but it is typically also optimal to implement a higher effort. The article provides conditions under which the latter "scale effect" dominates the former "substitution effect" and vice versa. If the ease of monitoring varies across occupations, the model predicts a nonmonotonic relationship between the wage level and workers' rents.