This paper examines firms' problem of how to motivate risk-averse workers not to shirk when workers' utility functions are unknown. The problem is studied in a 2-period setting in which a worker's actions today can influence not only his compensation today but the firms' beliefs about his preferences. Firms cannot credibly commit to ignore the revealed information, so workers' actions today affect their future compensation contracts. It is shown that, in the Wilson/Miyazaki equilibrium, firms may pool workers and learn about their types gradually over time rather than inducing them to separate and reveal their types immediately.

There has been limited application of the large theoretical literature in the areas of agency and monitoring to personnel management issues. The research developing and testing implications of agency theory on the design of compensation contracts has focused on managerial labor contracts; the theory of monitoring has seen even fewer applications to the personnel literature. The premise of this paper is that while agency issues may be directly applicable to managerial labor, for nonmanagerial personnel the monitoring problem must be addressed preliminary to the design of incentive contracts. I first describe the role of commitment in monitoring problems. This is then applied to a discussion of the difference between penalties and rewards in motivating workers. The relative success of Japanese manufacturing techniques is then put in the context of an organizational attempt to solve the monitoring problem. I conclude by suggesting areas for future research.