Robust Contracting for Sequential Search

Th\'eo Durandard, Udayan Vaidya and Boli Xu

Papers from arXiv.org

Abstract: A principal contracts with an agent who sequentially searches over projects to generate a prize. The principal is unaware of the agent's full set of projects and evaluates a contract by its worst-case performance. We characterize the principal's robustly optimal contracts, which are all debt-like: the agent is paid only when the prize exceeds a threshold. Debt is optimal because it preserves the agent's incentive to continue exploring, discouraging the agent from settling down for cheap, safe alternatives. Our predictions map to contracts used to incentivize innovation in practice.

Date: 2025-04, Revised 2026-09
New Economics Papers: this item is included in nep-cta and nep-mic
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