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Research Details

Optimal Monitoring Design, Econometrica

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

Article

Author(s)

George Georgiadis, Balazs Szentes

Date Published

2020

Citations

Georgiadis, George, and Balazs Szentes. 2020. Optimal Monitoring Design. Econometrica.(5): 2075-2107.

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