Who and How? Adverse Selection and flexible Moral Hazard

Henrique Castro-Pires, Deniz Kattwinkel and Jan Knoepfle

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Abstract: We characterize incentive compatible mechanisms in environments with hidden types and flexible hidden actions. Our approach introduces extended recommendation schedules that specify prescribed actions also off-path, after misreports. This approach yields a tractable and complete characterization of incentive compatibility, which includes a generalized integral monotonicity condition capturing the interaction between adverse selection and moral hazard. We demonstrate the usefulness of the characterization across a range of contracting problems.

Date: 2025-06, Revised 2025-09
New Economics Papers: this item is included in nep-des and nep-mic
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