Patrick W. Schmitz
Labour Economics, Vol. 12 (6), 2005, 727-738.
Abstract. Consider an employer who wants her employee to work hard. As is well known from the efficiency wage literature, the employer must pay the (wealth-constrained) employee a positive rent to provide incentives for exerting unobservable effort. Alternatively, the employer could make effort verifiable by costly workplace surveillance. It is argued that a privacy protection law preventing surveillance may increase the total surplus. While such a law reduces the employer's profit, this loss can be overcompensated by the employee's gain, because the employer invests in surveillance not only to implement higher effort, but also to reduce the employee's rent.
The working paper version is available for download at SSRN.
The paper is available for download.