Optimal Monitoring
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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.
Date: 9 February 2018, 14:15 (Friday, 4th week, Hilary 2018)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: IT Room
Speaker: Balazs Szentes (London School of Economics (LSE))
Organising department: Department of Economics
Part of: Nuffield Economic Theory Seminar
Booking required?: Not required
Audience: Members of the University only
Editors: Erin Saunders, Anne Pouliquen