Monitoring Team Members: Information Waste and the Transparency Trap

In a model of moral hazard in teams, we demonstrate that firms’ concerns about low trust among teammates can justify two common but otherwise puzzling patterns: information waste and transparency trap. We find that (i) firms predominantly employ individual performance bonuses, ignoring relevant information about team output, and (ii) competition for better contracts leads workers into a self-defeating race toward effort transparency. Notably, the firm may be indifferent to or benefit from trust concerns, challenging the idea that robustness concerns invariably harm the principal’s payoffs. Our analysis highlights a novel trade-off between the classical information rents and strategic insurance rents emerging from trust concerns.

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