The Demand for Mutual Monitoring
Abstract: In this paper we study monitoring behavior, punishment behavior, and their interaction in a simple exchange experiment. We assess whether and to what extent subjects will monitor, that is, engage in costly information acquisition prior to potential punishment in order to be able to condition damage inflicted on the target player's behavior. We do so by manipulating the monitoring costs both in a second party and a third party monitoring condition. This allows a bifocal investigation of (1) responses to changes in those costs and (2) potential differences in behavior between second and third parties. We find that some individuals withhold punishment altogether when monitoring gets costly while others switch to untargeted punishment with the result that the demand for monitoring information obeys the law of demand. Controlling for risk preferences, third parties are more likely to go for the risk of erroneous punishment. Overall, average net costs inflicted on defectors diminish considerably as monitoring gets costly.