A Reduction from Multi-Parameter to Single-Parameter Bayesian Contract Design
Abstract
The problem of contract design addresses the challenge of moral hazard in principle-agent setups. The agent exerts costly efforts that produce a random outcome with an associated reward for the principal. Moral hazard refers to the tension that the principal cannot observe the agent’s effort level hence needs to incentivize the agent only through rewarding the realized effort outcome, i.e., the contract. Bayesian contract design studies the principal’s design problem of an optimal contract when facing an unknown agent characterized by a private Bayesian type. In its most general form, the agent’s type is inherently “multi-parameter” and can arbitrarily affect both the agent’s productivity and effort costs. In contrast, a natural single-parameter setting of much recent interest simplifies the agent’s type to a single value that describes the agent’s cost per unit of effort, whereas agents’ efforts are assumed to be equally
productive.
The main result of this paper is an almost approximation-preserving polynomial-time reduction from the most general multi-parameter Bayesian contract design (BCD) to single-parameter BCD. That is, for any multi-parameter BCD instance I^M, we construct a single-parameter instance I^S such that any β-approximate contract (resp. menu of contracts) of I^S can in turn be converted to a (β − ϵ)-approximate contract (resp. menu of contracts) of I^M. The reduction is in time polynomial in the input size and log(1/ϵ); moreover, when β = 1 (i.e., the given single-parameter solution is exactly optimal), the dependence on 1/ϵ can be removed, leading to a polynomial-time exact reduction. This efficient reduction is somewhat surprising because in the closely related problem of Bayesian mechanism design, a polynomial-time reduction from multi-parameter to single-parameter setting is believed to not exist. Our result demonstrates the intrinsic difficulty of addressing moral hazard in Bayesian contract design, regardless of being single-parameter or multi-parameter.
As byproducts, our reduction answers two open questions in recent literature of algorithmic contract design: (a) it implies that optimal contract design in single-parameter BCD is not in APX unless P=NP even when the agent’s type distribution is regular, answering the open question of [3] in the negative; (b) it implies that the principal’s (order-wise) tight utility gap between using a menu of contracts and a single contract is Θ(n) where n is the number of actions, answering the major open question of [27] for the single-parameter case.
productive.
The main result of this paper is an almost approximation-preserving polynomial-time reduction from the most general multi-parameter Bayesian contract design (BCD) to single-parameter BCD. That is, for any multi-parameter BCD instance I^M, we construct a single-parameter instance I^S such that any β-approximate contract (resp. menu of contracts) of I^S can in turn be converted to a (β − ϵ)-approximate contract (resp. menu of contracts) of I^M. The reduction is in time polynomial in the input size and log(1/ϵ); moreover, when β = 1 (i.e., the given single-parameter solution is exactly optimal), the dependence on 1/ϵ can be removed, leading to a polynomial-time exact reduction. This efficient reduction is somewhat surprising because in the closely related problem of Bayesian mechanism design, a polynomial-time reduction from multi-parameter to single-parameter setting is believed to not exist. Our result demonstrates the intrinsic difficulty of addressing moral hazard in Bayesian contract design, regardless of being single-parameter or multi-parameter.
As byproducts, our reduction answers two open questions in recent literature of algorithmic contract design: (a) it implies that optimal contract design in single-parameter BCD is not in APX unless P=NP even when the agent’s type distribution is regular, answering the open question of [3] in the negative; (b) it implies that the principal’s (order-wise) tight utility gap between using a menu of contracts and a single contract is Θ(n) where n is the number of actions, answering the major open question of [27] for the single-parameter case.
