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monitoring of workers

Bad incentives put the brakes on firm growth: Evidence from Kenya's matatus: Guest post by Erin Kelley

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This is the third in this year's series of posts by PhD students on the job market.
A firm’s success rides heavily on the performance of its employees. It is therefore important that firms design employment contracts that properly incentivize hard work. This becomes more challenging when firms cannot observe the amount of effort employees invest, nor the amount of output they produce. In theory, firms can use monitoring technologies that reveal the performance of their workers more accurately to overcome this constraint (Holmstrom, 1979). In practice, however, the impact of such monitoring technologies on contracts and employee performance is unclear. Managers may not know how to leverage the additional information monitoring technologies reveal. Moreover, weak legal institutions, which prevent companies from credibly sanctioning bad behavior, may limit how useful the new information actually is. 
 
In my job market paper - co-authored with Gregory Lane and David Schönholzer – we study the impact of moral hazard on labor contracting, employee behavior, and the extent to which improved monitoring affects firm operations. We also establish whether any gains to companies come at the expense of their workers, or society at large. To this end, we implement a randomized control trial where we introduce a monitoring device to 255 firms (vehicle owners) operating in Kenya’s transit industry. We design a novel mobile application that provides information to 125 treatment firms regarding: the location of the vehicle, number of kilometers driven, number of hours the ignition was on, and the number of safety violations incurred (sharp-braking, sharp-turning, over-acceleration and speeding). We confirm that 70% of owners consult the app weekly. This information provides treatment owners with a more precise estimate of what revenue should be, and whether drivers are engaging in behavior that damages the vehicle. This has implications for the owners’ choice of contract and drivers’ behavior, which ultimately impact firm profits/growth. We use daily surveys from vehicle owners and drivers over six-months to track the impact of reducing asymmetric information on these outcomes.