Optimal Monitoring Design | Zendy

Georgiadis George | Zendy; Szentes Balazs | Zendy

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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 .

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