Contractibility Design
We introduce a model of incentive contracting in which the principal, in addition to writing contracts, must engage in contractibility design: creating an evidence structure that allows them to prove when the agent has breached the contract. Designing an evidence structure entails both (i) front-end costs borne ex ante, such as those of drafting contracts, and (ii) back-end costs borne ex post, such as those of generating evidence. We find that, under even small front-end costs, optimal contracts are coarse, specifying finitely many contingencies out of a continuum of possibilities. In contrast, under even large back-end costs, optimal contracts are complete. Applied to the design of procurement contracts, our results rationalize: (i) the discreteness of contracts, (ii) the presence of similarly vague contracts in low-stakes and high-stakes settings, and (iii) the discontinuous adjustment of contracts to changes in the economic environment.
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Copy CitationRoberto Corrao, Joel P. Flynn, and Karthik Sastry, "Contractibility Design," NBER Working Paper 34379 (2025), https://doi.org/10.3386/w34379.
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