Designing Menus of Contracts Efficiently: The Power of Randomization

Understand

We study hidden-action principal-agent problems in which a principal commits to an outcome-dependent payment scheme (called contract) so as to incentivize the agent to take a costly, unobservable action leading to favorable outcomes.

• In particular, we focus on Bayesian settings where the agent has private information.
• This is collectively encoded by the agent's type, which is unknown to the principal, but randomly drawn according to a finitely-supported, commonly-known probability distribution.
• In Bayesian principal-agent problems, the principal may be better off by committing to a menu of contracts specifying a contract for each agent's type, rather than committing to a single contract.