My colleague Lynda Khalaf's favourite saying is: Notation, notation, notation. Bad notation makes a paper difficult to follow. Papers that are hard to read and understand get rejected, or receive lower grades.
It's simple: B stands for benefits, C stands for costs, and t represents effort devoted to each task. Yet coming up with an intuitive system of symbols is not as easy as it looks.
One problem is that a lot of letters are already taken. Notice that Holstrom and Milgrom do not use "e" for effort, but instead "t" for effort spent on tasks. I would guess that they did this because, in a probabilistic model, "e" is generally used to represent the error term.
For similar reasons, Holstrom and Milgrom couldn't use "p" to stand for "principal", because p is commonly associated with either price or probability (or perhaps producer, profit or productivity). Using it for anything else is confusing. The way Holmstrom and Milgrom avoid this problem is really quite neat: they do not use any symbol at all for the principal or the agent. They don't have to, since benefits always go to the principal, and costs are always borne by the agent.
This illustrates another general rule suggested to me by University of Victoria economic theorist Linda Welling: avoid multiple subscripts or subscript/superscript combinations whenever possible. Consider, for example, what would happen if Holmstrom and Milgrom had used this notation instead:
Consider a principal-agent relationship in which the agent a makes a one-time choice of a vector of efforts ea = (ea1,...,ean) ...
For the author, multiple subscripts and superscripts create too many chances for errors or slippage when working or presenting. For the reader, it just makes things hard to remember.
One other rule is illustrated by the Holmstrom and Milgrom paper quoted above. Generally speaking, greek letters are used for parameters of the model, such as in this case μ (though note μ is actually a function). There are quite a number of conventions like this. For example, individual-level variables are often represented in lower-case, aggregate-level variables in upper-case. Perhaps others will suggest additional conventions in the comments.
The Holmstrom and Milgrom notation seems so simple and logical, but I would be willing to bet that it took them some time, and a bit erasing everything and starting again, to come up with it. An alternative approach is just to use the same notation as others in the literature have have done. This is one area where there are no points for originality - a paper that uses conventional notation will be easier for the reader to understand.
When working on a model, creating a list of symbols that you and any potential referees or examiners can refer back to is a good idea, even if that list does not go into the final version of the paper. Such a list will also reveal any confusing duplications, for example, use of c for cost and C for consumption. It may also suggest opportunities for simplification. Consider, for example, a model where the agent is splitting time three ways, between paid work, household production, and leisure. These three uses of time could be represented as L, l, and H, or as t1, t2 and t3, or as l1, l2 and l3. Which is simpler? Which is easier to remember? Is there something else that might be even better?
Once one has a model, one has to figure out what goes in between the equations (hint: economics). Every symbol used in a paper needs to be defined clearly the first time it mentioned. If the symbol has not been used in a while, it is a good idea to give the reader a hint as to what it means. For example, instead of always referring to C(t), occasionally say something like "the cost C(t)". A jet-lagged referee or professor reading a paper on a plane after a beer or two may find it challenging to remember the meaning of 10 different symbols.
It's been a while since I've done any serious theory, so I may not be the best person to give advice in this area. I hope that others will provide reactions, or additional suggestions, in the comments.