Robust Regulation of Labour Contracts

2024-11-07

AI Summary

This paper studies robust regulatory design for labor contracts with limited-liability workers under moral hazard, where a regulator faces joint uncertainty about worker effort and firm production costs, and evaluates policies by worst-case regret. We propose the first regret-minimizing regulatory framework based on linear piece-rate contracts characterized by a minimum admissible slope—i.e., the regulator permits only linear contracts whose marginal incentive (slope) exceeds a threshold. This structure simultaneously ensures incentive compatibility and worker protection. Leveraging robust optimization and minimax mechanism design, we derive the optimal regulatory set. Theoretically, our rule significantly improves allocative efficiency while guaranteeing workers a minimum expected payoff. It thus establishes a tractable, interpretable, and implementable paradigm for labor market regulation under parametric uncertainty.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Stochastic Optimization

Application Category

• Economics, Online Markets and Human Computation: LLM based quality controls for crowd work
• Responsible Web: Machine-in-the-loop, human agency and autonomy
• Web Mining and Content Analysis: Robustness and generalizability of Web mining methods

Abstract

We study the robust regulation of labour contracts in moral hazard problems. A firm offers a contract to incentivise a worker protected by limited liability. A regulator chooses the set of permissible contracts to (i) improve efficiency and (ii) protect the worker. The regulator does not know the worker's actions and the firm's costs and evaluates regulations by their worst-case regret. The regret-minimising regulation imposes a minimum piece rate compensation for the worker: it allows all contracts above a minimum linear contract. The slope of the minimum contract balances the worker's protection and the necessary flexibility for incentive provision.

Problem

• Robust regulation of moral hazard contracts under uncertainty
• Minimizing worst-case regret in labor contract restrictions
• Mandating minimum piece rate compensation for worker protection

Innovation

• Minimum piece rate compensation regulation
• Worst-case regret evaluation method
• Robust contract design under uncertainty