Kelley, Lane and Schönholzer (2020) develop a relational contracting model to study the role of monitoring in firms and evaluate the model experimentally in the field. Specifically, the authors introduce monitoring devices into commuter minibuses in Nairobi, Kenya, that track real-time vehicle driving behavior and daily productivity. They randomize which minibus owners have access to these monitoring data using a novel mobile app that they designed for the industry. In line with model predictions, they find that treated vehicle owners modify the terms of the contract by decreasing the transfer they demand in exchange for higher effort and lower risk-taking. Drivers respond accordingly by working more hours and decreasing risky driving behavior associated with higher repair costs. As a result, firm costs fall and profits increase. Structural estimation via simulated method of moments demonstrates a close match of the data to the contract model and suggests overall welfare increases stemming from lower firm costs.
