Optimal Reporting Frequency in Agencies

We consider a multi-period principal-agent model, in which an agent's actions influence the mean and variance of the firm's future income stream. We characterize the optimal compensation contract under an information system, which reports periodic incomes. We show that the contractual efficiency increases as the reporting frequency increases, and derive the principal's optimal choice of the reporting frequency. Our comparative static analysis predicts that when the income stream is more variable. it is optimal to increase the reporting frequency, whereas when the variation of the income stream is more sensitive to the agent's action, the optimal reporting frequency decreases. We also provide comparative static implications associated with the incentive power placed on the estimated variance of the reported income.