Optimal Monitoring Design
George Georgiadis and
Econometrica, 2020, vol. 88, issue 5, 2075-2107
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.
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Persistent link: https://EconPapers.repec.org/RePEc:wly:emetrp:v:88:y:2020:i:5:p:2075-2107
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