Why do people behave better when observed?
It sounds like rational behaviour (i.e., it is not a cognitive bias). Monitoring generally creates a closer link between behaviour and social consequences (either rewards or punishments).

A huge number of theories capture ideas about how the social context influences behaviour (e.g., social norms).

In the work context, you could look at ideas around maximal and typical performance. 

That said, there is literature that looks at the pros and cons of monitoring on workplace performance. In particular, excessively fine grained monitoring can lead to increased stress, lower job satisfaction, turnover, etc. See for example Kinnie et al for a discussion.

References

Kinnie, N., Hutchinson, S., &amp; Purcell, J. (2000). 'Fun and surveillance': the paradox of high commitment management in call centres. International Journal of Human Resource Management, 11(5), 967-985.