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Optimal Monitoring Design

George Georgiadis and Balazs Szentes

Econometrica, 2020, vol. 88, issue 5, 2075-2107

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.

Date: 2020
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