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

Lionel Thomas ()
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Lionel Thomas: CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE]

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Abstract: This paper studies the optimal contract offered by a risk-neutral principal to a risk-averse agent when the agent's hidden efficiency and action both improve the probability of the project being successful. We show that if the agent is sufficiently prudent and efficient, the principal induces a higher probability of success than under moral hazard, despite the costly informational rent given up. Moreover, 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.

Keywords: Adverse selection; moral hazard; risk aversion; prudence (search for similar items in EconPapers)
Date: 2016-09-20
New Economics Papers: this item is included in nep-cta and nep-hrm
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