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Optimal Monitoring Design

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.

Type

Working Paper

Author(s)

George Georgiadis, Balazs Szentes

Date Published

2018

Citations

Georgiadis, George, and Balazs Szentes. 2018. Optimal Monitoring Design.

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