Optimal Monitoring Design. Issue 5 (25th September 2020)

• Record Type: Journal Article
• Authors: Georgiadis, George; Szentes, Balazs
• Is Part Of: Econometrica. Volume 88:Issue 5(2020)
• Page Start: 2075
• Page End: 2107
• Publication Date: 2020-09-25
• Subjects: Principal‐agent -- moral hazard -- monitoring; Econometrics -- Periodicals; Economics, Mathematical -- Periodicals; Economics -- Periodicals; Économétrie -- Périodiques; Mathématiques économiques -- Périodiques; Économie politique -- Périodiques; 330.05
• DOI: 10.3982/ECTA16475
• Languages: English
• ISSNs: 0012-9682

Abstract

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 .