Designing Contracts for Effort and Regulatory Compliance

Yixuan Li, Liang Shan, Chang Sun, Xiaodong Yan

Keywords: contract theory, incentives, game theory, mechanism design, statistical inference

TL;DR: Observing noisy evidence, the principal sets a statistical menu and a budgeted inspection policy to achieve incentive-compatible quality and compliance.

Abstract: We study mechanism design for principals who must both incentivize agents to exert high-quality effort and ensure that their actions remain legal and compliant. In certain two-sided markets, agents’ actions are unobservable, and they may face extra costs to maintain compliance. Agents maximize their own utility, while principals seek mechanisms that induce both effort and adherence to rules. We propose a contract framework based on hypothesis testing that combines payments with random inspections to deter strategic misbehavior and promote legal, high-quality actions.

Primary Area: alignment, fairness, safety, privacy, and societal considerations

Submission Number: 19193