Introduction and Theoretical Framework:
In this paper Loughry and Tosi argue that peer monitoring -when directed properly- can largely improve the work performance. They acknowledge the necessity of having an organizational formal system like guidelines and regulations (Cardinal et al. 2004). However, depending only on formal control will increase the risk of miscommunication and disbelieve inside the organization; additionally, this will make controls -to some extend- costly (Sitkin and Bies 1993). That is why it is now important to explore peer monitoring as a supportive yet cost-effective tool for organizational control.
After reviewing the literature, Loughry and Tosi found that only agency theory suggests that peer monitoring can be a good way "to align worker's behaviour with organizational interests" (Alchian and Demsetz, Fama and Jensen cited in Loughry and Tosi 2008: 877-878). Moreover, as Arnott and Stiglitz illustrated, workers usually know more about their colleagues, so peer monitoring can be effectively employed as a beneficial mechanism to reduce the moral hazard problems (1991) and to improve the "risk-sharing capabilities" (1991: 189).
By reducing moral hazard problems, principals can avoid "hidden action" (Loughry and Tosi 2008: 877) which is not matching the organization's interests, better know about the real capacity and skills of the employees. Thus, having the right person in the right place and finally to have an overall good work execution (Loughry and Tosi 2008).
Nevertheless, the idea of peer monitoring was not a particular area of focus for previous organizational scholars. Some earlier researchers like Taylor (1916) and Roethlisberger and Dickson (1939) discussed only the restrictive effect of peer monitoring on performance (Loughry and Tosi 2008).
The agency theory does not pay appropriate attention that peer monitoring is basically a social process so that a lot of human factors should be taken in consideration (Loughry and Tosi 2008).