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Limited liability and non-responsiveness in agency models

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  • Castro-Pires, Henrique
  • Moreira, Humberto

Abstract

This paper analyzes the optimal menu of contracts offered by a risk-neutral principal to a risk-averse agent under moral hazard, adverse selection, and limited liability. We show that a limited liability constraint causes pooling of the most efficient agent types. We also find sufficient conditions under which full pooling is optimal, regardless of the agent's risk aversion or type distribution. Our model suggests that offering a single contract is often optimal in environments with moral hazard, adverse selection, and in which the principal faces a limited liability constraint.

Suggested Citation

  • Castro-Pires, Henrique & Moreira, Humberto, 2021. "Limited liability and non-responsiveness in agency models," Games and Economic Behavior, Elsevier, vol. 128(C), pages 73-103.
    • Handle: RePEc:eee:gamebe:v:128:y:2021:i:c:p:73-103
    DOI: 10.1016/j.geb.2021.03.010
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    References listed on IDEAS

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    Cited by:

    1. Gottlieb, Daniel & Moreira, Humberto, 2022. "Simple contracts with adverse selection and moral hazard," LSE Research Online Documents on Economics 114348, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Limited liability; Adverse selection; Moral hazard; Pooling contracts; Non-responsiveness;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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