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The Power of Menus in Contract Design

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  • Guru Guruganesh
  • Jon Schneider
  • Joshua Wang
  • Junyao Zhao

Abstract

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. As a corollary, we show this implies an analogous gap between deterministic menus of (general) contracts and randomized menus of contracts (as introduced by Castiglioni et al. (2022)).

Suggested Citation

  • Guru Guruganesh & Jon Schneider & Joshua Wang & Junyao Zhao, 2023. "The Power of Menus in Contract Design," Papers 2306.12667, arXiv.org.
    • Handle: RePEc:arx:papers:2306.12667
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    References listed on IDEAS

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    1. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    2. Alon Cohen & Moran Koren & Argyrios Deligkas, 2018. "Learning Approximately Optimal Contracts," Papers 1811.06736, arXiv.org, revised Jul 2022.
    3. Jiarui Gan & Minbiao Han & Jibang Wu & Haifeng Xu, 2022. "Generalized Principal-Agency: Contracts, Information, Games and Beyond," Papers 2209.01146, arXiv.org, revised Feb 2024.
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