The Complexity of Continuous Contract Design over Polymatroids
Max Klimm, Paul Lippke, Philipp Warode
cs.GT
Nov 3, 2026 · v1
TL;DR
All results, including operation-count and oracle-call bounds, are formalized in Lean 4, with an accompanying Lean formalization artifact.
Abstract
We study optimal contracts when an agent allocates continuous effort subject to polymatroid capacity constraints. Effort produces a linear expected reward and incurs a cost. With binary outcomes and limited liability, the principal chooses a single reward share. For linear costs, an optimal contract can be computed in polynomial time. For quadratic costs, the agent has a unique best response computable by polynomially many submodular minimizations, yet optimizing the principal's share is NP-hard even for explicitly represented cut-based rank functions. With $n$ activities, the best-response path can have $2^{n-O(\log n)}$ breakpoints even when each reward coefficient and each rank value is an integer representable in $O(n\log n)$ bits. The construction also answers a question of Allman, Lo, and McCormick on polynomial bit length for source-sink monotone two-parameter minimum cuts. Despite this complexity, an optimal contract for quadratic costs always exists with a share of at most $1/2$. Consequently, $O(1/\varepsilon)$ best-response computations suffice for a $(1-\varepsilon)$-approximation. For rational quadratic costs on explicitly described rational polytopes containing zero, this gives a fully polynomial-time approximation scheme. More generally, a share of at most $1/p$ suffices for continuous convex costs homogeneous of degree $p>1$, on any compact convex action set containing zero. For general convex costs with an exact value and bounded-subgradient oracle, we obtain an oracle approximation scheme using approximate best responses and a supplied lower bound on positive welfare.
Problem
The paper studies how to compute optimal linear contracts when an agent allocates continuous effort subject to polymatroid capacity constraints, with linear rewards and convex costs. With continuous effort, the finite-candidate-share arguments used for finite action spaces no longer apply.
Approach
For linear costs, the agent's response is piecewise constant in the share, so the principal optimizes over finitely many candidate shares. For quadratic costs, best responses are computed by water-filling and submodular minimization, and the piecewise-affine response curve is analyzed. A reduction from Subset Sum is built on 'comb' instances with cut-based rank functions. Approximation schemes use a geometric discretization of the share together with share bounds derived from cost homogeneity. All results are formalized in Lean 4.
Results
Linear costs admit a polynomial-time optimal contract. For quadratic costs, the best-response path can have 2^{n-O(log n)} breakpoints, and optimizing the share is NP-hard even for cut-based rank functions. An optimal share of at most 1/2 (or 1/p for degree-p homogeneous costs) always exists, which yields an FPTAS for rational quadratic costs and an oracle approximation scheme for general convex costs.