This study investigates experimentally how mutual monitoring affects effort when employees are compensated via rank‐order tournaments. Theory and anecdotal evidence suggest that mutual monitoring may either decrease effort by facilitating collusion or increase effort by stimulating competition. In our first experiment, we find that mutual monitoring increases effort, because participants do not attempt to collude but rather behave competitively. This result leads us to expand our theory and develop hypotheses to predict that the effect of mutual monitoring depends on whether employees have the inclination to collude or compete. Specifically, we predict that mutual monitoring decreases effort when employees are inclined to collude and increases effort when employees are inclined to compete; that is, mutual monitoring will not change the basic inclination created by the workplace setting, but will “turn up the volume” on the effect that such inclination has on effort. Consistent with our predictions, our second experiment finds that mutual monitoring leads to lower effort when participants have a collusive inclination and (eventually) higher effort when they have a competitive inclination. Overall, the results from these two experiments suggest that allowing employees to observe each other's productive effort in tournament incentive settings may have positive or negative consequences for the firm, depending on whether environmental factors predispose employees to collude or compete.

We examine changes in bank loan contracts after borrowers experience a nearby local newspaper closure. Compared to a sample of control firms, we find that the closure of a local newspaper leads to higher interest spreads for borrowers. This effect is more pronounced when there are fewer related lenders in the syndicate, when lenders have less prior lending experience in the local area, when the closed local newspapers are associated with increases in misconduct cases, and for institutional lenders who rely more heavily on others for monitoring. In addition, we observe that loan contract amendments become less frequent, while covenant strictness increases following newspaper closures. Our main findings are robust to various research design specifications and are not driven by deteriorating local economic conditions. Our findings suggest that local media still plays a significant role in the debt markets, even as society moves deeper into the internet era.