American Economic Review Vol. 105 No. 2 2015
Robustness and Linear Contracts
Abstract
We consider a moral hazard problem where the principal is uncertain as to what the agent can and cannot do: she knows some actions available to the agent, but other, unknown actions may also exist. The principal demands robustness, evaluating possible contracts by their worst-case performance, over unknown actions the agent might potentially take. The model assumes risk-neutrality and limited liability, and no other functional form assumptions. Very generally, the optimal contract is linear. The model thus offers a new explanation for linear contracts in practice. It also introduces a flexible modeling approach for moral hazard under nonquantifiable uncertainty.
- DOI
- 10.1257/aer.20131159
- Volume
- 105
- Issue
- 2
- Pages
- 536-563
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib