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Open Access Publications from the University of California

Monitoring in Target Contracts: Theory and Experiment in Kenyan Public Transit

  • Author(s): Kelley, Erin M.;
  • Lane, Gregory;
  • Schönholzer, David
  • et al.

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Technologies that allow firms to monitor employees are becoming widespread. Westudy how these technologies affect informal contracts and firm productivity. Specifically, we introduce monitoring devices into commuter minibuses in Nairobi, Kenya, that track real-time vehicle driving behavior and daily productivity. We randomize which minibus owners have access to these monitoring data using a novel mobile app that we designed for the industry. We find that treated vehicle owners modify the terms of the contract to induce higher effort and lower risk-taking, which results in lower firm costs. To interpret these findings, we develop a relational contracting model that demonstrates how monitoring can improve the efficiency of the owner-driver contract. Structural estimation of the contract model via simulated method of moments suggests moderate welfare increases stemming from lower firm costs, although drivers are only partially compensated for the loss of their information rent.

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