Optimal monitoring design

George Georgiadis and Balázs Szentes

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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-agents; moral hazard; monitoring (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-09-01
New Economics Papers: this item is included in nep-cta, nep-des, nep-hrm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in Econometrica, 1, September, 2020, 88(5), pp. 2075 - 2107. ISSN: 0012-9682

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:104062

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