Martin Dumav, Universidad Carlos III de Madrid

In moral-hazard settings with ambiguity about how actions lead to outcomes, we show

that linear contracts are optimal when both parties’ pessimistic expectations align under mild cost conditions. Simplicity in contract design ensures robustness, as nonlinear contracts create inefficiencies by misaligning worst-case beliefs under symmetric ambiguity. Linear contracts remain optimal across various ambiguity structures, even when the principal doesn’t know the agent’s exact perception—so long as the agent is less ambiguous than the principal. In asymmetric ambiguity cases, nonlinearity leads to inefficient gaps in worst-case payoffs, which linear contracts eliminate.