Disentangling Moral Hazard and Adverse Selection

Henrique Castro-Pires, Hector Chade and Jeroen Swinkels

American Economic Review, 2024, vol. 114, issue 1, 1-37

Abstract: While many real-world principal-agent problems have both moral hazard and adverse selection, existing tools largely analyze only one at a time. Do the insights from the separate analyses survive when the frictions are combined? We develop a simple method—decoupling—to study both problems at once. When decoupling works, everything we know from the separate analyses carries over, but interesting interactions also arise. We provide simple tests for whether decoupling is valid. We develop and numerically implement an algorithm to calculate the decoupled solution and check its validity. We also provide primitives for decoupling to work and analyze several extensions.

JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/aer.20220100 (application/pdf)
https://doi.org/10.3886/E193349V1 (text/html)
https://www.aeaweb.org/doi/10.1257/aer.20220100.appx (application/pdf)
https://www.aeaweb.org/doi/10.1257/aer.20220100.ds (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:114:y:2024:i:1:p:1-37

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/aer.20220100

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().