Limited liability and non-responsiveness in agency models

Henrique Castro-Pires and Humberto Moreira

Games and Economic Behavior, 2021, vol. 128, issue C, 73-103

Abstract: This paper analyzes the optimal menu of contracts offered by a risk-neutral principal to a risk-averse agent under moral hazard, adverse selection, and limited liability. We show that a limited liability constraint causes pooling of the most efficient agent types. We also find sufficient conditions under which full pooling is optimal, regardless of the agent's risk aversion or type distribution. Our model suggests that offering a single contract is often optimal in environments with moral hazard, adverse selection, and in which the principal faces a limited liability constraint.

Keywords: Limited liability; Adverse selection; Moral hazard; Pooling contracts; Non-responsiveness (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:128:y:2021:i:c:p:73-103

DOI: 10.1016/j.geb.2021.03.010

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