COSTLY VERIFICATION OF COST PERFORMANCE AND THE COMPETITION FOR INCENTIVE CONTRACTS

This article analyzes the optimal linear incentive contract to offer t o would-be agents competing for a principal's project when the princip al finds it costly to observe an agent's cost performance ex post and cannot commit to a monitoring policy ex ante. Cost sharing reduces the winning bidder's informational rents but creates an incentive for the agent to pad costs ex post and to slacken his effort. The optimal cos t-sharing parameter generally differs from that when monitoring is cos tless, and it is higher the fewer the number of bidders and the larger the variance of their idiosyncratic cost.