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 initially knows only one of the agent's available 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 only paid when the prize exceeds a threshold. Debt is optimal because it preserves the option value of continued exploration. Our characterization encompasses several common contract forms, including pure debt, debt-plus-equity, and capped-earnout debt. We identify settings in which each of these contracts is uniquely optimal.
Date: 2025-04, Revised 2025-09
New Economics Papers: this item is included in nep-cta and nep-mic
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