Ambiguity in dynamic contracts

We study a continuous-time principal-agent model in which the principal is ambiguity averse about agent's effort cost. The robust contract generates seemingly excessive pay-performance sensitivity. worst-case cost high after good performance, but low bad leads to overcompensation and undercompensation respectively provides new rationale for performance-sensitive debt. also characterize incentives when misspecified, i.e., he offered contract, his true differs from worst case. Then, termination can induce shirking, strength of hump-shaped, agents close firing prefer riskier projects, while those getting paid safer ones. This feature resembles careers organizations, most notably risk-shifting quiet life.