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) |
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Pages (from-to) | 2075-2107 |
Number of pages | 33 |
Journal | Econometrica |
Volume | 88 |
Issue number | 5 |
DOIs | |
State | Published - Sep 1 2020 |
Keywords
- Principal-agent
- monitoring
- moral hazard
ASJC Scopus subject areas
- Economics and Econometrics