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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: https://researchonline.lse.ac.uk/id/eprint/104062/
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    References listed on IDEAS

    as
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    Cited by:

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    2. McClellan, Andrew, 2025. "The dynamics of project standards," Journal of Economic Theory, Elsevier, vol. 224(C).
    3. Tan, Teck Yong, 2023. "Optimal transparency of monitoring capability," Journal of Economic Theory, Elsevier, vol. 209(C).
    4. Vasudha Jain & Mark Whitmeyer, 2021. "Search and Competition with Flexible Investigations," Papers 2104.13159, arXiv.org.
    5. Lingxiao Huang & Wenyang Xiao & Nisheeth K. Vishnoi, 2026. "Delegation and Verification Under AI," Cowles Foundation Discussion Papers 2500, Cowles Foundation for Research in Economics, Yale University.
    6. Tal Alon & Paul Dutting & Yingkai Li & Inbal Talgam-Cohen, 2022. "Approximate Optimality of Linear Contracts Under Uncertainty," Papers 2211.06850, arXiv.org, revised Mar 2025.

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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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