Dynamic Contracts with Moral Hazard and Adverse Selection

Alex Gershkov and Motty Perry

No 001-11, Working Papers from International School of Economics at TSU, Tbilisi, Republic of Georgia

Abstract: We study a novel dynamic principal—agent setting with moral hazard and adverse selection (persistent as well as repeated). In the model an agent whose skills are his private information faces a finite sequence of tasks, one after the other. Upon arrival of each task the agent learns its level of difficulty and then chooses whether to accept or refuse each task in turn, and how much effort to exert. Although his decision to accept or refuse a task is publicly known, the agent's effort level is his private information. We characterize optimal contracts and show that the per-period utility of the agent approaches his per-period utility when his skills are publicly known, as the discount factor and the time horizon increase.

Pages: 52 pages
Date: 2011-06
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Journal Article: Dynamic Contracts with Moral Hazard and Adverse Selection (2012)
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