Abstract: In the principle-agent problem with moral hazard, the observation of the state of nature has the same effect with the monitoring of agent’s action. Considering the cost of observation, this paper puts forward the state-observation model and analyzes the informational asymmetry with Baysian theorem. Then we discuss the impacts of different observation level on agent’s effort, risky cost and agency cost, etc. At the end of this paper, we present the condition that principle would like to observe the state of nature.

Key words: principle-agent problem, informational asymmetry, baysian theorem, monitor