Affiliation: University of Iowa, Tippie College of Business
Title: "Robust Contracting for Sequential Search", (joint with Theo Durandard & Udayan Vaidya)
Abstract: A principal contracts with an agent who can sequentially search over projects to generate a prize. The principal knows only one of the agent's available projects and evaluates a contract by its worst-case performance. We characterize the set of robustly optimal contracts, all of which involve a minimum debt level, i.e., the agent only receives payment if the prize exceeds a certain threshold. Debt is essential to prevent the agent from terminating the search too early. Our characterization encompasses several commonly observed contract formats, including pure debt, convertible debt, and capped-earnout debt. We identify situations where each of these contracts emerges as the unique prediction. In contrast to much of the existing robust contracting literature, linear contracts are strictly sub-optimal because they dampen the agent's search incentive.