Short-lived Teams with Mutual Monitoring∗

We show that the free-riding problem in short-lived teams is not as severe as previously thought. Two critical conditions are: team members can observe each other’s effort periodically, which makes mutual monitoring possible; technology is convex (increasing marginal returns) or has a “completion benefit.” In principal-agent settings, mutual monitoring reduces the necessary wage payment to induce efforts, thus making team production relatively more attractive. In partnership settings, mutual monitoring can reduce the range of inefficiency. The more convex is the technology, and the more frequently team members interact with each other, the more effective mutual monitoring is in discouraging free-riding.