Optimal Reward Design in Principal-Agent Model

This paper investigates the optimal design of reward schemes and cost correlation structures in a two-period principal-agent model under a budget constraint. The findings offer practical insights for resource allocation, particularly in scenarios like research funding. The core contribution lies in identifying how budget constraints influence the optimal reward strategy, shifting from first-period performance targeting (sufficient performance) under low budgets to second-period performance targeting (sustained performance) under high budgets. The analysis of cost correlation's impact further enhances the practical relevance of the study.