How to design incentive systems based on the multiple signals from agent´s behavior

Agency theory has often been employed to discuss the incentive problems. Holmstrom (1979) noted that if there is a signal from the agent´s behavior, the principal had a better design of incentive systems by considering this signal. In this paper, a model including intrinsic motivation which is given little considerations in the former models is developed. From the analysis, the following results are obtained: 1) when the agent is highly intrinsically motivated, the principal has to take not only the accurate signal but also the noisy signal into account in evaluating the agent´s behavior; and 2) when the agent is not intrinsically motivated, the principal has to evaluate the agent´s behavior based on only the signal which has few noises