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2023

The Power of Menus in Contract Design

Guruganesh, Guru, Schneider, Jon, Wang, Joshua et al.

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We study the power of menus of contracts in principal-agent problems with adverse selection (agents can be one of several types) and moral hazard (we cannot observe agent actions directly).

For principal-agent problems with $T$ types and $n$ actions, we show that the best menu of contracts can obtain a factor $\Omega(\max(n, \log T))$ more utility for the principal than the best individual contract, partially resolving an open question of Guruganesh et al.
(2021).
We then turn our attention to randomized menus of linear contracts, where we likewise show that randomized linear menus can be $\Omega(T)$ better than the best single linear contract.

The Power of Menus in Contract Design · Around

Built on

Moral hazard and observability
B. Holmström · 1979
Earlier work this paper cites.
An analysis of the principal-agent problem
S. J. Grossman and O. D. Hart · 1983
Earlier work this paper cites.
Pricing randomized allocations
P. Briest, S. Chawla, R. Kleinberg, and S. M. Weinberg · 2010
Earlier work this paper cites.
Simple versus optimal contracts
P. Dütting, T. Roughgarden, and I. Talgam-Cohen · 2019
Earlier work this paper cites.

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Then

Contracts under moral hazard and adverse selection
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Designing menus of contracts efficiently: The power of randomization
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