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Contractibility Design

Author

Listed:
  • Roberto Corrao
  • Joel P. Flynn
  • Karthik Sastry

Abstract

We introduce a model of incentive contracting in which the principal, in addition to writing contracts, must engage in contractibility design: creating an evidence structure that allows them to prove when the agent has breached the contract. Designing an evidence structure entails both (i) front-end costs borne ex ante, such as those of drafting contracts, and (ii) back-end costs borne ex post, such as those of generating evidence. We find that, under even small front-end costs, optimal contracts are coarse, specifying finitely many contingencies out of a continuum of possibilities. In contrast, under even large back-end costs, optimal contracts are complete. Applied to the design of procurement contracts, our results rationalize: (i) the discreteness of contracts, (ii) the presence of similarly vague contracts in low-stakes and high-stakes settings, and (iii) the discontinuous adjustment of contracts to changes in the economic environment.

Suggested Citation

  • Roberto Corrao & Joel P. Flynn & Karthik Sastry, 2025. "Contractibility Design," NBER Working Papers 34379, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34379
    Note: IO LE
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K0 - Law and Economics - - General

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