A Study of the Owner's Commission Model and Incentive Contract Based on Principal-Agent Relationship

In the engineering, the formation of a typical principal-agent relationship is formed between the owner and the engineering-construction supervisor. The owner entrusts the supervisor with the construction management and monitors his work. The owner's question is how to choose the right commission model on the basis of his monitoring capacity and design an optimal contract to encourage the supervisor to choose action which meets the owner's maximal interest. By comparing the supervisor’ s optimal behavior choices under the incentive contract which only contains sharing the result and under the incentive-monitoring contract which contains sharing the result and monitoring the process, this article proves that when the level of the owner's monitoring capacity is higher than a critical value, the owner should choose partial commission model and design the incentive-monitoring contract ,and keep improving his level of monitoring capacity in order to pursue the higher level of the supervisor's effort. When the level of the owner's monitoring capacity is lower than the critical value, the owner should choose complete commission model and design the incentive contract which only contains sharing the result. In view of the engineering practice, we point out that the competence of the owner's representative will impact the owner's optimal choice.