Econometrica: Sep 2020, Volume 88, Issue 5

Optimal Monitoring Design

https://doi.org/10.3982/ECTA16475
p. 2075-2107

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.



Log In To View Full Content

Supplemental Material

Supplement to "Optimal Monitoring Design"

This online appendix contains additional material not found within the manuscript.

Read More View PDF


Back