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Optimal monitoring design

Georgiadis, George and Szentes, Balázs (2020) Optimal monitoring design. Econometrica. ISSN 0012-9682 (In Press)

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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.

Item Type: Article
Official URL: https://onlinelibrary.wiley.com/journal/14680262
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
Date Deposited: 16 Apr 2020 10:12
Last Modified: 06 Aug 2020 13:21
URI: http://eprints.lse.ac.uk/id/eprint/104062

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