Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253455 
Year of Publication: 
2020
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 15 [Issue:] 3 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2020 [Pages:] 1135-1173
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
Recent technology advances have enabled firms to flexibly process and analyze sophisticated employee performance data at a reduced and yet significant cost. We develop a theory of optimal incentive contracting where the monitoring technology that governs the above procedure is part of the designer's strategic planning. In otherwise standard principal-agent models with moral hazard, we allow the principal to partition agents' performance data into any finite categories and to pay for the amount of information the output signal carries. Through analysis of the trade-off between giving incentives to agents and saving the monitoring cost, we obtain characterizations of optimal monitoring technologies such as information aggregation, strict MLRP, likelihood ratio-convex performance classification, group evaluation in response to rising monitoring costs, and assessing multiple task performances according to agents' endogenous tendencies to shirk. We examine the implications of these results for workforce management and firms' internal organizations.
Subjects: 
Incentive contract
endogenous monitoring technology
JEL: 
D86
M15
M5
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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