We'll consider a two-period shirking model with the following features. First, at the start of each period, the firm chooses the bonus level for that period. Second, the firm can invest, at a cost, to improve its monitoring technology (so that shirking employees are more likely to be caught) in the first period. There are two tasks, one in period = 1 and one in period = 2, to be performed by a worker in a firm. In each period, the worker chooses whether to work ( = 1) or shirk ( = 0). Working costs < 1 for the worker in each period. If the worker shirks in period , he is caught with probability 0 1. If caught shirking, the worker is fired immediately and receives zero wages in that period. Otherwise, he receives a bonus for that period. Before the first period starts, the firm can invest in improving the monitoring technology for the first period, at a cost. Specifically, it can choose 1 (the probability of catching the worker shirking in the first period) at a cost 1 . The monitoring technology for the second period is fixed at 2 = 1/2. The worker