Adverse Selection

Jakša Cvitanić and Jianfeng Zhang
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Jakša Cvitanić: California Institute of Technology
Jianfeng Zhang: University of Southern California

Chapter Chapter 8 in Contract Theory in Continuous-Time Models, 2013, pp 137-153 from Springer

Abstract: Abstract The continuous-time adverse selection problems we consider can be transformed into calculus of variations problems on choosing the optimal expected utility for the agent. When the cost is quadratic, the optimal contract is typically a nonlinear function of the final output value and it may also depend on the underlying source of risk. With risk-neutral agent and principal, a range of lower type agents gets non-incentive cash contracts. As the cost of the effort gets higher, the non-incentive range gets wider, and only the highest type agents get informational rent. The rent gets smaller with higher values of cost, as do the incentives.

Keywords: Risky Asset; Adverse Selection; Optimal Contract; True Type; Adverse Selection Problem (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/978-3-642-14200-0_8

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