Dominance of contributions monitoring in teams

In team problems it has been previously argued that there is no loss to the principal from monitoring team output compared to monitoring of individual contributions, a result known as monitoring equivalence. Optimal output monitoring, however, sometimes required up front payment from the agents to the principal. By introducing limited liability (LL) on the part of agents that rules out positive monetary transfers to the principal, it is shown that the principal strictly benefits by monitoring individual contributions. Positive rent of the lowest type under output monitoring with LL implies there will be a dominating contributions monitoring contract that further transfers some of this rent to the principal. Thus, unlimited agent liability is necessary for the equivalence result.