Risk Sharing in an Adverse Selection Model

Raymond Deneckere, André de Palma () and Luc Leruth
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Raymond Deneckere: University of Wisconsin-Madison
Luc Leruth: ULiège - Université de Liège = University of Liège = Universiteit van Luik = Universität Lüttich, IMF Office in Europe - EUO

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We introduce risk aversion in a mixed moral hazard/adverse selection model. Under plausible assumptions, the effort level of the firm is distorted downward from the first best level of effort for both agent types. Thus, the traditional result of no distortion on the top does not hold with risk aversion. We also show that the effort level of the low-cost type may be distorted more than that of the high cost type. With an observable cost shock, an increase in exogenous risk may increase the effort level of the efficient firm and lower the expected cost of the project.

Keywords: Regulation; Incentives; Contract Theory; Risk-Sharing. (search for similar items in EconPapers)
Date: 2016-11-07
New Economics Papers: this item is included in nep-mic, nep-ppm and nep-reg
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Working Paper: Risk Sharing in an Adverse Selection Model (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-01393213

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