Disentangling Moral Hazard and Adverse Selection

  title={Disentangling Moral Hazard and Adverse Selection},
  author={Hector Chade and Jeroen M. Swinkels},
This paper analyzes a canonical principal-agent problem with moral hazard and adverse selection. The agent is risk averse and has private information about his disutility of taking an unobservable action. The principal is risk neutral and designs a menu of contracts consisting of a compensation scheme and a recommended action for each type of agent to maximize expected profit. We first derive a set of sufficient conditions for menus to be feasible (i.e., satisfy participation and incentive… CONTINUE READING
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