Approximate Optimality of Linear Contracts Under Uncertainty
Computer Science and Game Theory
2025-03-05 v3 Theoretical Economics
Abstract
We consider a hidden-action principal-agent model, in which actions require different amounts of effort, and the agent privately knows his ability that determines his cost of effort. We show that linear contracts admit approximation guarantees that improve with a natural metric that captures the degree of uncertainty in the contracting setting. We thus show that linear contracts are near-optimal whenever there is enough uncertainty. In contrast, other simple contract formats such as debt contracts may suffer from a loss linear in the number of possible actions, even when there is sufficient uncertainty.
Cite
@article{arxiv.2211.06850,
title = {Approximate Optimality of Linear Contracts Under Uncertainty},
author = {Tal Alon and Paul Dütting and Yingkai Li and Inbal Talgam-Cohen},
journal= {arXiv preprint arXiv:2211.06850},
year = {2025}
}
Comments
A one-page abstract of this paper was accepted at EC 2023 under the title "Bayesian Analysis of Linear Contracts"