Robust Regulation of Labour Contracts

We study the robust regulation of contracts in moral hazard problems. A firm offers a contract to incentivise a worker protected by limited liability. A regulator restricts the set of permissible contracts to (i) improve efficiency and (ii) protect the worker. The regulator faces uncertainty about both the worker’s actions and the firm’s production cost, and evaluates regulations based on their worst-case regret. The regret-minimising regulation mandates a minimum piece rate compensation for the worker. This rule simultaneously guarantees a fair share for the worker and preserves enough contractual flexibility to provide incentives.