The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent

4Citations
Citations of this article
16Readers
Mendeley users who have this article in their library.

Abstract

This paper studies the optimal contract offered by a risk-neutral principal to a risk-averse agent when the agent’s hidden ability and action both improve the probability of the project being successful. We show that if the agent is sufficiently prudent and able, the principal induces a higher probability of success than under moral hazard, despite the costly informational rent given up. Moreover, there is distortion at the top. Finally, the conditions to avoid pooling are difficult to satisfy because of the different kinds of incentives to be managed and the overall trade-off between rent extraction, insurance, and efficiency involved.

Cite

CITATION STYLE

APA

Maréchal, F., & Thomas, L. (2018). The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent. Games, 9(1). https://doi.org/10.3390/g9010012

Register to see more suggestions

Mendeley helps you to discover research relevant for your work.

Already have an account?

Save time finding and organizing research with Mendeley

Sign up for free