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Simple versus optimal contracts

Dütting, Paul, Roughgarden, Tim and Talgam-Cohen, Inbal (2019) Simple versus optimal contracts. In: 20th ACM conference on Economics and Computation, 2019-06-24 - 2019-06-28.

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Identification Number: 10.1145/3328526.3329591

Abstract

We consider the classic principal-agent model of contract theory, in which a principal designs an outcomedependent compensation scheme to incentivize an agent to take a costly and unobservable action. When all of the model parameters-including the full distribution over principal rewards resulting from each agent action-are known to the designer, an optimal contract can in principle be computed by linear programming. In addition to their demanding informational requirements, however, such optimal contracts are often complex and unintuitive, and do not resemble contracts used in practice. This paper examines contract theory through the theoretical computer science lens, with the goal of developing novel theory to explain and justify the prevalence of relatively simple contracts, such as linear (pure commission) contracts. First, we consider the case where the principal knows only the first moment of each action's reward distribution, and we prove that linear contracts are guaranteed to be worst-case optimal, ranging over all reward distributions consistent with the given moments. Second, we study linear contracts from a worst-case approximation perspective, and prove several tight parameterized approximation bounds.

Item Type: Conference or Workshop Item (Paper)
Official URL: https://sigecom.org/ec19/
Additional Information: © 2019 The Authors
Divisions: Mathematics
Subjects: Q Science > QA Mathematics > QA75 Electronic computers. Computer science
Date Deposited: 29 May 2019 16:06
Last Modified: 25 Mar 2020 00:20
URI: http://eprints.lse.ac.uk/id/eprint/100779

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