Recent technology advances have given firms the flexibility to 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 described 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 that the output signal carries. Through analysis of the trade-off between giving incentives to agents and saving the cost of data processing and analysis , we obtain characterizations of optimal monitoring technologies such as information aggregation, strict MLRP, likelihood ratio-convex performance classification, group evaluation in response to high monitoring costs, and assessing the various task performances according to agents' endogenous tendencies to shirk. We examine the implications of these results for workforce management and firms' URLanizations.
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 that 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' URLanizations.
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given firms the flexibility to
enabled firms to flexibly
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described
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cost of data processing and analysis
monitoring cost
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high
rising
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the various
multiple