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The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent

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  • Lionel Thomas

    (Université de Bourgogne Franche-Comté, CRESE)

Abstract

This paper studies the optimal contract offered by a risk-neutral principal to a riskaverse agent when the agent's hidden efficiency and action both improve the probability of the project being successful. We show that if the agent is sufficiently prudent and efficient, the principal induces a higher probability of success than under moral hazard, despite the costly informational rent given up. Moreover, the conditions to avoid pooling are difficult to satisfy because of the different kinds of incentives to be managed and the overall trade-off between rent extraction,insurance, and efficiency involved.Keywords:Adverse selection, moral hazard, risk aversion, prudence

Suggested Citation

  • Lionel Thomas, 2016. "The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent," Working Papers 2016-09, CRESE.
    • Handle: RePEc:crb:wpaper:2016-09
    as

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    References listed on IDEAS

    as
    1. Bruno Jullien & Bernard Salanié & François Salanié, 2007. "Screening risk-averse agents under moral hazard: single-crossing and the CARA case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(1), pages 151-169, January.
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    4. Ollier, Sandrine & Thomas, Lionel, 2013. "Ex post participation constraint in a principal–agent model with adverse selection and moral hazard," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2383-2403.
    5. Eeckhoudt, Louis & Gollier, Christian & Schneider, Thierry, 1995. "Risk-aversion, prudence and temperance: A unified approach," Economics Letters, Elsevier, vol. 48(3-4), pages 331-336, June.
    6. Peter S. Faynzilberg & Praveen Kumar, 2000. "original papers : On the generalized principal-agent problem: Decomposition and existence results," Review of Economic Design, Springer;Society for Economic Design, vol. 5(1), pages 23-58.
    7. Sandrine Ollier, 2007. "On the generalized principal-agent problem: a comment," Post-Print hal-00447191, HAL.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    adverse selection; moral hazard; risk aversion; prudence;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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