This paper considers a Principal-Agent model with hidden action in which the Principal (i) can monitor the Agent by acquiring costly information about his effort and (ii) aims to implement a target level of effort at minimal cost. In particular, the Principal can access independent signals about the Agent's effort at a constant marginal 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.

Joint with Balazs Szentes