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Optimal Monitoring Design

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  • George Georgiadis
  • Balazs Szentes

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.

Suggested Citation

  • George Georgiadis & Balazs Szentes, 2020. "Optimal Monitoring Design," Econometrica, Econometric Society, vol. 88(5), pages 2075-2107, September.
    • Handle: RePEc:wly:emetrp:v:88:y:2020:i:5:p:2075-2107
    DOI: 10.3982/ECTA16475
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    References listed on IDEAS

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    Cited by:

    1. Gerardi, Dino & Grillo, Edoardo & Monzón, Ignacio, 2022. "The perils of friendly oversight," Journal of Economic Theory, Elsevier, vol. 204(C).
    2. Tan, Teck Yong, 2023. "Optimal transparency of monitoring capability," Journal of Economic Theory, Elsevier, vol. 209(C).
    3. Vasudha Jain & Mark Whitmeyer, 2021. "Search and Competition with Flexible Investigations," Papers 2104.13159, arXiv.org.
    4. Tal Alon & Paul Dutting & Yingkai Li & Inbal Talgam-Cohen, 2022. "Bayesian Analysis of Linear Contracts," Papers 2211.06850, arXiv.org, revised Jul 2023.

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