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Flexible Information in Contract Design

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Grand Hyatt, Travis A
Hosted By: Econometric Society
  • Chair: Chang Liu, Harvard University

Data-Driven Contract Design

Justin Ellis Burkett
,
Georgia Institute of Technology
Maxwell Rosenthal
,
Georgia Institute of Technology

Abstract

This paper proposes a prior-free model of incentive contracting wherein the principal’s beliefs
about the agent’s production technology are characterized by revealed preference data. The
principal and the agent are each financially risk neutral and the agent’s preferences are understood to be quasilinear in effort. Prior to contracting with the agent, the principal observes the outcome of a finite number of observations, each of which consists of (1) a contract and (2) the distribution of output (but not the effort cost) associated with the agent’s best response to that contract. She views any technology that rationalizes this data as plausible, and evaluates contracts according to their guaranteed expected payoff against the set of rationalizable technologies. We show that robustly optimal contracts are equity bonus contracts that supplement the contracts in the data with equity payments. Our model makes no assumptions about the agent’s technology beyond rationalizability of the revealed preference data, which itself is characterized by straightforward textbook criteria.

Flexible Moral Hazard Problems

George Georgiadis
,
Northwestern University
Doron Ravid
,
University of Chicago
Balazs Szentes
,
London School of Economics

Abstract

This paper considers a moral hazard problem where the agent can choose any output distribution with a support in a given compact set. The agent's effort-cost is smooth and increasing in first-order stochastic dominance. To analyze this model, we develop a generalized notion of the first-order approach applicable to optimization problems over measures. We demonstrate each output distribution can be implemented and identify those contracts that implement that distribution. These contracts are characterized by a simple first-order condition for each output that equates the agent's marginal cost of changing the implemented distribution around that output with its marginal benefit. Furthermore, the agent's wage is shown to be increasing in output. Finally, we consider the problem of a profit-maximizing principal and provide a first-order characterization of principal-optimal distributions.

Robust Contracts with Exploration

Chang Liu
,
Harvard University

Abstract

We study a two-period moral hazard problem; there are two agents, with identical action sets that are unknown to the principal. The principal contracts with each agent sequentially, and seeks to maximize the worst-case discounted sum of payoffs, where the worst case is over the possible action sets. The principal observes the action chosen by the first agent, and then offers a new contract to the second agent based on this knowledge, thus having the opportunity to explore in the first period. We define a suitable rule of updating and characterize the principal’s optimal payoff guarantee. Following nonlinear first-period contracts, optimal second-period contracts may also be nonlinear in some cases. Nonetheless, we find that linear contracts are optimal in both periods.

Indirect Persuasion

Rahul Deb
,
University of Toronto
Mallesh Pai
,
Rice University
Maher Said
,
New York University

Abstract

We provide an organizational economics foundation for commitment to information structures in persuasion. An uninformed principal faces a joint screening-and-persuasion problem: she wants to influence a receiver’s beliefs about a payoff-relevant state using information elicited from a privately informed agent. The principal cannot act as an intermediary that commits to an optimal garbling of the agent’s private communications; instead, the agent’s messages are publicly observed by the receiver. We show that the principal can still (indirectly) implement the optimal unconstrained intermediation scheme. Commitment to an employment contract with the agent alone suffices for optimal persuasion of the receiver. We apply our result to the context of a brokerage contracting with a sell-side analyst, where private communication is constrained by conflict-of-interest regulations. We show that a public communication scheme which closely corresponds to the investment ratings schemes observed in practice can sidestep these regulations.
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty