When Should an Employer Offer an Opaque Contract?∗

In many cases, an employer has private information about the potential productivity of a worker, who in turn has private information about the effort she exerts on the job. Much of the literature on this subject restricts the employer to offer contracts that leave her no discretion once a contract is accepted, while more general mechanisms may allow the employer to exercise discretion after acceptance. This paper studies the advantages to the employer of presenting the worker with a set of potential contract from which the employer will choose after the worker has accepted the offer. Specifically, in a two-state principal-agent model with moral hazard, I show that the employer can obtain strictly higher expected payoffs than the restricted contracts of the literature by offering a set of contracts to be chosen from after the offer is accepted.