Optimal Monitoring Design
George Georgiadis*, Balazs Szentes
Date: 2018-05-12 3:45 pm – 4:15 pm
Last modified: 2018-04-27
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.