Optimal Monitoring Design

George Georgiadis; Balazs Szentes

doi:10.3982/ECTA16475

Optimal Monitoring Design

George Georgiadis^*, Balazs Szentes

^*Corresponding author for this work

Strategy

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

Abstract

This paper considers a Principal–Agent model with hidden action in which the Principal can monitor the Agent by acquiring independent signals conditional on effort at a constant marginal cost. The Principal aims to implement a target effort level at minimal cost. The main result of the paper is that the optimal information-acquisition strategy is a two-threshold policy and, consequently, the equilibrium contract specifies two possible wages for the Agent. This result provides a rationale for the frequently observed single-bonus wage contracts.

Original language	English (US)
Pages (from-to)	2075-2107
Number of pages	33
Journal	Econometrica
Volume	88
Issue number	5
DOIs	https://doi.org/10.3982/ECTA16475
State	Published - Sep 1 2020

Keywords

Principal-agent
monitoring
moral hazard

ASJC Scopus subject areas

Economics and Econometrics

Access to Document

10.3982/ECTA16475

Fingerprint Dive into the research topics of 'Optimal Monitoring Design'. Together they form a unique fingerprint.

Cite this

@article{36c660842ce642ada4935339033ce09d,

title = "Optimal Monitoring Design",

abstract = "This paper considers a Principal–Agent model with hidden action in which the Principal can monitor the Agent by acquiring independent signals conditional on effort at a constant marginal cost. The Principal aims to implement a target effort level at minimal cost. The main result of the paper is that the optimal information-acquisition strategy is a two-threshold policy and, consequently, the equilibrium contract specifies two possible wages for the Agent. This result provides a rationale for the frequently observed single-bonus wage contracts.",

keywords = "Principal-agent, monitoring, moral hazard",

author = "George Georgiadis and Balazs Szentes",

note = "Publisher Copyright: {\textcopyright} 2020 The Econometric Society",

year = "2020",

month = sep,

day = "1",

doi = "10.3982/ECTA16475",

language = "English (US)",

volume = "88",

pages = "2075--2107",

journal = "Econometrica",

issn = "0012-9682",

publisher = "Wiley-Blackwell",

number = "5",

}

TY - JOUR

T1 - Optimal Monitoring Design

AU - Georgiadis, George

AU - Szentes, Balazs

PY - 2020/9/1

Y1 - 2020/9/1

N2 - This paper considers a Principal–Agent model with hidden action in which the Principal can monitor the Agent by acquiring independent signals conditional on effort at a constant marginal cost. The Principal aims to implement a target effort level at minimal cost. The main result of the paper is that the optimal information-acquisition strategy is a two-threshold policy and, consequently, the equilibrium contract specifies two possible wages for the Agent. This result provides a rationale for the frequently observed single-bonus wage contracts.

AB - This paper considers a Principal–Agent model with hidden action in which the Principal can monitor the Agent by acquiring independent signals conditional on effort at a constant marginal cost. The Principal aims to implement a target effort level at minimal cost. The main result of the paper is that the optimal information-acquisition strategy is a two-threshold policy and, consequently, the equilibrium contract specifies two possible wages for the Agent. This result provides a rationale for the frequently observed single-bonus wage contracts.

KW - Principal-agent

KW - monitoring

KW - moral hazard

UR - http://www.scopus.com/inward/record.url?scp=85091457397&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85091457397&partnerID=8YFLogxK

U2 - 10.3982/ECTA16475

DO - 10.3982/ECTA16475

M3 - Article

AN - SCOPUS:85091457397

VL - 88

SP - 2075

EP - 2107

JO - Econometrica

JF - Econometrica

SN - 0012-9682

IS - 5

ER -

Optimal Monitoring Design

Abstract

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Cite this