Optimal Monitoring Design

George Georgiadis*, Balazs Szentes

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-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 languageEnglish (US)
Pages (from-to)2075-2107
Number of pages33
JournalEconometrica
Volume88
Issue number5
DOIs
StatePublished - Sep 1 2020

Keywords

  • Principal-agent
  • monitoring
  • moral hazard

ASJC Scopus subject areas

  • Economics and Econometrics

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