Distributionally Robust Contract Design with Deferred Inspection

Halil I. Bayrak and Martin Bichler

Papers from arXiv.org

Abstract: We study a robust contract design problem with deferred inspection, in which a principal allocates a scarce resource to an agent, observes the agent's realized outcome ex post at negligible cost, and conditions transfers on this information through rewards. The principal faces ambiguity about the agent's value distribution and seeks to maximize worst-case expected revenue subject to incentive compatibility and limited liability. In contrast to existing work on inspection mechanisms, which relies on common-prior assumptions, we adopt a distributionally robust approach based on moment information. Our main contribution is a complete characterization of the robust contract design problem with a single agent. When the ambiguity set is defined by the first moment, we identify a robustly optimal contract with a concave allocation rule and a linear payment rule. We further show that robustness does not uniquely pin down transfers: we construct a Pareto robustly optimal contract that preserves the same allocation while extracting maximal feasible payments from all types, yielding strictly higher expected revenue under non-worst-case distributions. We also derive structural results for multi-agent extensions. For ambiguity sets defined by the first $N$ moments, we show that robust optimality requires aggregate payments to be lower bounded by a multi-dimensional polynomial of degree $N$. However, unlike the single-agent case, robust multi-agent mechanisms are substantially more complex: dominant-strategy incentive compatibility becomes necessary, simple monotone mechanisms are no longer tractable, and worst-case distributions may involve correlated types or degenerate to a Dirac distribution at the mean. These results highlight a sharp contrast between robust contract design and robust multi-agent mechanism design with inspection.

Date: 2025-06, Revised 2026-01
New Economics Papers: this item is included in nep-cta, nep-des and nep-mic
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