Locally robust contracts for moral hazard

Gabriel Carroll and Delong Meng

Journal of Mathematical Economics, 2016, vol. 62, issue C, 36-51

Abstract: We consider a moral hazard problem in which the principal has a slight uncertainty about how the agent’s actions translate into output. An incentive contract can be made robust against an ϵ amount of uncertainty, at the cost of a loss to the principal on the order of ϵ, by refunding a small fraction of profit to the agent. We show that as ϵ goes to zero, this construction is essentially optimal, in the sense of minimizing the worst-case loss, among all modifications to the contract that do not depend on the details of the environment.

Keywords: Contract; Principal–agent problem; Local robustness; Worst-case; Optimality-robustness tradeoff (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:62:y:2016:i:c:p:36-51

DOI: 10.1016/j.jmateco.2015.11.001

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