Optimal delegated search with adverse selection and moral hazard

Abstract

This paper studies a model of delegated search. The distribution of search rev-enues is unknown to the principal and has to be elicited from the agent so as to design the optimal search policy. At the same time, the search process is un-observable, requiring search to be self-enforcing. The two information asymme-tries are mutually enforcing: if one is relaxed, delegated search is efficient. With both asymmetries prevailing simultaneously, search is almost surely inefficient (it is stopped too early). Second-best remuneration is shown to optimally utilize a menu of simple bonus contracts. In contrast to standard adverse selection prob-lems, indirect nonlinear tariffs are strictly dominated.