Optimal Monitoring Design, Econometrica
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.
George Georgiadis, Balazs Szentes
Georgiadis, George, and Balazs Szentes. 2020. Optimal Monitoring Design. Econometrica. 88(5): 2075-2107.LINK