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Screening Risk Averse Agents Under Moral Hazard

Bruno Jullien (), Bernard Salanié () and François Salanié ()

No 3076, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Principal-agent models of moral hazard have been developed under the assumption that the principal knows the agent's risk-aversion. This Paper extends the moral hazard model to the case when the agent's risk-aversion is his private information, so that the model also exhibits adverse selection. We characterize the optimal menu of contracts; while its detailed properties depend on the setting, we show that some of them must hold for all environments. In particular, the power of incentives always decreases with risk-aversion. We also characterize the relationship between the outside option and the optimal contracts. We then apply our results to insurance, managerial incentive pay and corporate governance.

Keywords: contracts; insurance (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2001-10
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