Seminar

Private Revisions of Contracts: A Robustly Tractable Approach to Optimal Contracting

John Zhu (Wharton Pennsylvania University)

November 24, 2014, 12:30–14:00

Room MF 323

Fédération des Banques Françaises Seminar

Abstract

I study optimal contracting in a general repeated moral hazard setting where the noisy signals of the agent's hidden efforts are either privately observed by the principal or observed by both agent and principal but not verifiable. In this setting, there is a subset of contract renegotiations that cannot be detected by the public. I call these renegotiations private revisions and I show that optimal private-revision-proof contracts are robustly tractable: Each date, if the signal exceeds some threshold then the agent is retained. Otherwise the agent is randomly terminated. This simple structure does not rely on any strong assumptions about the utility functions or the nature of the underlying uncertainty.