Monitoring in Target Contracts: Theoryand Experiment in Kenyan Public Transit
This paper develops a relational contracting model to study the role of monitoring in firms and evaluate the model experimentally in the field
Abstract
We develop a relational contracting model to study the role of monitoring in firms andevaluate the model experimentally in the field. Specifically, we introduce monitoring devicesinto commuter minibuses in Nairobi, Kenya, that track real-time vehicle driving behavior anddaily productivity. We randomize which minibus owners have access to these monitoring datausing a novel mobile app that we designed for the industry. In line with model predictions,we find that treated vehicle owners modify the terms of the contract by decreasing the transferthey demand in exchange for higher effort and lower risk-taking. Drivers respond accordingly byworking 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 ofmoments demonstrates a close match of the data to the contract model and suggests overallwelfare increases stemming from lower firm costs.
This work is part of the Private Enterprise Development in Low Income Countries (PEDL) programme
Citation
Kelley, E., Lane, G. and Schoenholzer, D. (2020) “Monitoring in Target Contracts: Theoryand Experiment in Kenyan Public Transit” Working Paper
Link
Monitoring in Target Contracts: Theoryand Experiment in Kenyan Public Transit