Simple Contracts for Due Diligence and Execution
Abstract: We study a continuous-time principal-agent model in which an expert makes an unobservable, irreversible investment in learning skill before privately acquiring information about a project's profitability. This dual friction—moral hazard in expertise acquisition and asymmetric information in the belief trajectory—creates a fundamental lower-bound "Expertise Threshold". We show that due to time discounting, any optimal interior investment in learning speed is strictly bounded away from zero; the agent must achieve a discrete level of expertise to overcome the friction of delay. To induce investment and informative due diligence, the principal utilizes completion-contingent contracts coupled with partial delegation. By assigning execution responsibility to the agent with positive probability, the principal generates a "liability buffer" that relaxes limited-liability constraints and reduces the informational rents required to motivate the investment and rapid learning.