  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 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' internal organizations.
