Mitigating non-contractibility with interim randomization

This paper studies interim randomization in contracting settings with multi -sided incentive problems. More specifically, we show that in a principal-a gent model with auditing the principal mitigates a non-contractibility of a uditing by conditioning the contract on a random signal that is revealed at an interim stage of play. Optimal contracts are therefore random. In contr ast to existing literature on random contracts, interim randomization enabl es contracting parties to achieve allocations that lie outside the convex h ull of the set of attainable allocations under deterministic contracting.