Agent shapes offered choices to gain bigger contract benefits
Strategic Disclosure of Action Space in Principal-Agent Contracts
Computer Science and Game Theory
Summary
This paper looks at situations where an agent can control which options the principal sees before making a contract. If the principal cannot check the agent's true costs, the agent can claim nearly all the benefits. When costs can be checked, the authors find strategies that let the agent keep a good portion of the benefits even when the principal uses simple contract forms. They also show that overall efficiency stays reasonable despite this strategic hiding. The work highlights how hiding or revealing options changes how rewards get split between agents and principals.
What this means in practice
- •For contract designers: Create contracts anticipating agents might hide or limit their visible choices to improve their own outcome.
- •For business negotiators: Inform negotiation strategies where one side may strategically limit visible options to shape deals in their favor.
A theory result. No direct application yet.
Authors
Xiaotie Deng, Ningyuan Li
Abstract
We study strategic disclosure of the action space in principal-agent contracting, where an agent selects a disclosed action set to shape the principal's perception of her capabilities before contract design. Unaware of the strategic disclosure, the principal designs a revenue-optimal contract as if the disclosed action set were complete and accurate. We consider two variants distinguished by cost verifiability. When costs are unverifiable, the agent can extract the entire first-best surplus, leaving the principal with zero revenue. When costs are verifiable, we characterize the agent's optimal disclosure strategy in binary-outcome settings and, more generally, when the principal is restricted to linear contracts, reducing the agent's problem to a two-variable convex optimization problem. We prove that the agent can secure utility of at least a $1/e$ fraction of the first-best surplus, which also yields a $1/e$ welfare guarantee under optimal disclosure. While the principal's revenue can be arbitrarily small compared to the first-best surplus, when the ratio of maximum to minimum expected reward among non-null base actions is at most $L$, we establish a revenue guarantee of $Θ(1/\log L)$ relative to the first-best surplus. We also compare utilities and welfare under strategic disclosure with their counterparts in the canonical model. Finally, we extend the agent's $1/e$ utility guarantee to general outcome spaces without restricting the principal to linear contracts. Our results show how strategic action-space disclosure changes the distribution of surplus while preserving a constant-factor welfare guarantee under the agent's optimal disclosure.