Adverse Selection and Moral Hazard with Multidimensional Types

Suehyun Kwon

No 6631, CESifo Working Paper Series from CESifo

Abstract: This paper studies a contracting problem where agents’ cost of actions is private information. With two actions, this leads to a two-dimensional screening problem with moral hazard. There is a natural one-dimensional ordering of types when there is both adverse selection and moral hazard. Regardless of the number of types, an optimal menu of contracts either pools every type together or offers a menu of two contracts. Any incentive-compatible menu of contracts has to satisfy pairwise single-crossing properties in incentivized actions and ex-ante utilities. The principal can no longer sell the firm to the agent.

Keywords: adverse selection; moral hazard; multidimensional types (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cta and nep-mic
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