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Delegated Project Search

Author

Listed:
  • Xi Chen

    (Nanjing University, China)

  • Yu Chen

    (University of Graz, Austria)

  • Xuhu Wan

    (Hong Kong University of Science and Technology, Hong Kong)

Abstract

This paper explores a new continuous-time principal-agent problem for a firm with both moral hazard and adverse selection. Adverse selection appears at random times. The agent finds projects sequentially by exerting costly effort. Each project brings output to the firm, subject to the agent s private shocks. These serial shocks are i.i.d and independent of the arrival time of new projects and the agent s efforts. The shocks and efforts constitute the agent s asymmetric information. We provide a full characterization of optimal contracts in which moral hazard effect and adverse selection effects interact. The second-best contract with moral hazard can achieve first-best efficiency, and third-best contract with the moral hazard and adverse selection can achieve second-best efficiency under pure adverse selection, if the agent is expectably rich enough. The payment is front-loaded under pure moral hazard. When moral hazard is combined with adverse selection, the payment can be backloaded or front-loaded, depending on the level of expectable wealth.

Suggested Citation

  • Xi Chen & Yu Chen & Xuhu Wan, 2018. "Delegated Project Search," Graz Economics Papers 2018-11, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2018-11
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    References listed on IDEAS

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    More about this item

    Keywords

    Dynamic Contract; Continuous Time; Moral Hazard; Adverse Selection; Project Search;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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