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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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    2. Paul Duetting & Michal Feldman & Inbal Talgam-Cohen, 2024. "Algorithmic Contract Theory: A Survey," Papers 2412.16384, arXiv.org.
    3. Tan, Teck Yong, 2023. "Optimal transparency of monitoring capability," Journal of Economic Theory, Elsevier, vol. 209(C).
    4. Cai, Dong & Zhang, Guoxing & Lai, Kee-hung & Guo, Chunxiang & Su, Bin, 2024. "Government incentive contract design for carbon reduction innovation considering market value under asymmetric information," Energy Policy, Elsevier, vol. 186(C).
    5. Vasudha Jain & Mark Whitmeyer, 2021. "Search and Competition with Flexible Investigations," Papers 2104.13159, arXiv.org.
    6. Jiadong Gu, 2024. "Data Trade and Consumer Privacy," Papers 2406.12457, arXiv.org, revised Jul 2024.
    7. Burkett, Justin & Rosenthal, Maxwell, 2024. "Statistical uncertainty and coarse contracts," Journal of Economic Theory, Elsevier, vol. 220(C).
    8. 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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