Econometrica: Sep 2020, Volume 88, Issue 5
Optimal Monitoring Design
George Georgiadis, Balazs Szentes
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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Supplement to "Optimal Monitoring Design"
This online appendix contains additional material not found within the manuscript.