Simple contracts with adverse selection and moral hazard

Gottlieb, Daniel ORCID: 0000-0002-0555-6185 and Moreira, Humberto (2022) Simple contracts with adverse selection and moral hazard. Theoretical Economics, 17 (3). 1357 – 1401. ISSN 1933-6837

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Abstract

We study a principal-agent model with moral hazard and adverse selection. Risk-neutral agents with limited liability have arbitrary private information about the distribution of outputs and the cost of effort. We show that under a multiplicative separability condition, the optimal mechanism offers a single contract. This condition holds, for example, when output is binary. If the principal’s payoff must also satisfy free disposal and the distribution of outputs has the monotone likelihood ratio property, the mechanism offers a single debt contract. Our results generalize if the output distribution is “close” to multiplicatively separable. Our model suggests that offering a single contract may be optimal in environments with adverse selection and moral hazard when agents are risk neutral and have limited liability.

Item Type:	Article
Official URL:	https://econtheory.org/index.php
Additional Information:	© 2022 The Authors
Divisions:	Management
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
Date Deposited:	14 Mar 2022 14:51
Last Modified:	17 Apr 2024 19:45
URI:	http://eprints.lse.ac.uk/id/eprint/114348

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