The Power of Menus in Contract Design

Guru Guruganesh, Jon Schneider, Joshua R. Wang, Junyao Zhao

Abstract: We study the power of menus of contracts in principal-agent problems with adverse selection (agents can be one of several types) and moral hazard (we cannot observe agent actions directly). For principal-agent problems with T types and n actions, we show that the best menu of contracts can obtain a factor Ω (max(n, log T)) more utility for the principal than the best individual contract, partially resolving an open question of Guruganesh et al. [2021]. We then turn our attention to randomized menus of linear contracts, where we likewise show that randomized linear menus can be Ω(T) better than the best single linear contract. As a corollary, we show this implies an analogous gap between deterministic menus of (general) contracts and randomized menus of contracts (as introduced by Castiglioni et al. [2022]).