Robust contracting and voluntary disclosure

This paper analyzes contracting between a principal and an agent when the principal is uncertain exactly which actions may be feasible for the agent and has a strong desire for robustness (in the worst-case or maxmin sense) of the expected profits generated. A prominent and path-breaking paper in this direction is Carroll (2015), which demonstrates that linear contracts are robustly (worst-case) optimal given uncertainty about an agent’s available actions. What if, when it is in their interest, the agent could choose to disclose that they have access to a particular additional action, and such statements could be verified by the principal? Does this change the form of robustly optimal contracts offered to an agent who either chooses not to disclose or has no additional action to disclose? Are such contracts still linear? We show that voluntary disclosure can substantially change the form of robustly optimal contracts. In particular, we show the possibility of and provide sufficient conditions for equilibrium contracts offered following non-disclosure to be non-linear. This equilibrium non-linearity does not always occur. We show that linearity results when there are few publicly known-to-be-available actions that generate a positive surplus.