Abstract
We consider a moral hazard problem in which the principal has a slight uncertainty about how the agent’s actions translate into output. An incentive contract can be made robust against an ϵ amount of uncertainty, at the cost of a loss to the principal on the order of ϵ, by refunding a small fraction of profit to the agent. We show that as ϵ goes to zero, this construction is essentially optimal, in the sense of minimizing the worst-case loss, among all modifications to the contract that do not depend on the details of the environment.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.