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Optimal Monitoring Design
Author(s) -
Georgiadis George,
Szentes Balazs
Publication year - 2020
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta16475
Subject(s) - principal (computer security) , marginal cost , wage , constant (computer programming) , action (physics) , computer science , principal–agent problem , economics , microeconomics , econometrics , labour economics , computer security , finance , corporate governance , physics , quantum mechanics , programming language
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 .