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Optimal monitoring design

Author

Listed:
  • Georgiadis, George
  • Szentes, Balázs

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

  • Georgiadis, George & Szentes, Balázs, 2020. "Optimal monitoring design," LSE Research Online Documents on Economics 104062, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:104062
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    File URL: http://eprints.lse.ac.uk/104062/
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    References listed on IDEAS

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    7. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    8. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563, Elsevier.
    9. Baiman, S & Demski, Js, 1980. "Economically Optimal Performance Evaluation And Control-Systems," Journal of Accounting Research, Wiley Blackwell, vol. 18, pages 184-220.
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    12. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
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    Citations

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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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    More about this item

    Keywords

    principal-agents; moral hazard; monitoring;
    All these keywords.

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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