Optimal incentive contract with endogenous monitoring technology

Artikel

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Theoretical Economics ; ISSN: 1555-7561 ; Volume: 15 ; Year: 2020 ; Issue: 3 ; Pages: 1135-1173 ; New Haven, CT: The Econometric Society

Classification and Topics

• Classification: Wirtschaft ; Economics of Contract: Theory ; IT Management
• Subject: Incentive contract ; endogenous monitoring technology

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Li, Anqi ; Yang, Ming
• Event: Veröffentlichung
• (who): The Econometric Society
• (where): New Haven, CT
• (when): 2020

Further information

• DOI: doi:10.3982/TE3130
• Handle: http://hdl.handle.net/10419/253455
• Last update: 10.03.2025, 11:43 AM CET