Incentivizing Information Acquisition
For economists designing incentives for information acquisition, this paper provides a theoretical justification for using simple cutoff-based contracts, which are common in practice.
The paper studies a principal-agent model where a principal incentivizes an agent to acquire costly information about an unknown state. It identifies a mild condition under which an optimal transfer scheme has a simple cutoff structure: the agent receives a fixed prize if his prediction is close to the state, and nothing otherwise.
I study a principal-agent model in which a principal hires an agent to collect information about an unknown continuous state. The agent acquires a signal whose distribution is centered around the state, controlling the signal's precision at a cost. The principal observes neither the precision nor the signal, but rather, using transfers that can depend on the state, incentivizes the agent to choose high precision and report the signal truthfully. I identify a sufficient and necessary condition on the agent's information structure which ensures that there exists an optimal transfer with a simple cutoff structure: the agent receives a fixed prize when his prediction is close enough to the state and receives nothing otherwise. This condition is mild and applies to all signal distributions commonly used in the literature.