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Current version: September 2025.
We study the robust regulation of contracts in moral hazard problems. A firm offers a contract to incentivise a worker protected by limited liability. A regulator restricts the set of permissible contracts to (i) improve efficiency and (ii) protect the worker. The regulator faces uncertainty about both the worker’s actions and the firm’s production cost, and evaluates regulations based on their worst-case regret. The regret-minimising regulation mandates a minimum piece rate compensation for the worker. This rule simultaneously guarantees a fair share for the worker and preserves enough contractual flexibility to provide incentives.
Current version: September 2025.
A principal contracts with an agent who sequentially searches over projects to generate a prize. The principal initially knows only one of the agent’s available projects and evaluates a contract by its worst-case performance. We characterize the principal’s robustly optimal contracts, which are all debt-like: the agent is only paid when the prize exceeds a threshold. Debt is optimal because it preserves the option value of continued exploration. Our characterization encompasses several common contract forms, including pure debt, debt-plus-equity, and capped-earnout debt. We identify settings in which each of these contracts is uniquely optimal.
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