Scalable Principal-Agent Contract Design via Gradient-Based Optimization

• URL: http://arxiv.org/abs/2510.21177v1
• Date: Fri, 24 Oct 2025 06:00:02 GMT
• Title: Scalable Principal-Agent Contract Design via Gradient-Based Optimization
• Authors: Tomer Galanti, Aarya Bookseller, Korok Ray,
• Abstract summary: We study a bilevel emphmax-max optimization framework for principal-agent contract design.<n>This problem underlies applications ranging from market design to delegated portfolio management.<n>We introduce a generic algorithmic framework that removes the reliance on closed forms.
• Score: 7.1284366727738275
• License: http://creativecommons.org/licenses/by/4.0/
• Abstract: We study a bilevel \emph{max-max} optimization framework for principal-agent contract design, in which a principal chooses incentives to maximize utility while anticipating the agent's best response. This problem, central to moral hazard and contract theory, underlies applications ranging from market design to delegated portfolio management, hedge fund fee structures, and executive compensation. While linear-quadratic models such as Holmstr"om-Milgrom admit closed-form solutions, realistic environments with nonlinear utilities, stochastic dynamics, or high-dimensional actions generally do not. We introduce a generic algorithmic framework that removes this reliance on closed forms. Our method adapts modern machine learning techniques for bilevel optimization -- using implicit differentiation with conjugate gradients (CG) -- to compute hypergradients efficiently through Hessian-vector products, without ever forming or inverting Hessians. In benchmark CARA-Normal (Constant Absolute Risk Aversion with Gaussian distribution of uncertainty) environments, the approach recovers known analytical optima and converges reliably from random initialization. More broadly, because it is matrix-free, variance-reduced, and problem-agnostic, the framework extends naturally to complex nonlinear contracts where closed-form solutions are unavailable, such as sigmoidal wage schedules (logistic pay), relative-performance/tournament compensation with common shocks, multi-task contracts with vector actions and heterogeneous noise, and CARA-Poisson count models with $\mathbb{E}[X\mid a]=e^{a}$. This provides a new computational tool for contract design, enabling systematic study of models that have remained analytically intractable.

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