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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

    (CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE])

Abstract

This paper studies the optimal contract offered by a risk-neutral principal to a risk-averse 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.

Suggested Citation

  • Lionel Thomas, 2016. "The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent," Working Papers hal-01374709, HAL.
    • Handle: RePEc:hal:wpaper:hal-01374709
    Note: View the original document on HAL open archive server: https://hal.science/hal-01374709v1
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    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    2. David Crainich & Louis Eeckhoudt, 2005. "La notion économique de prudence. Origine et développements récents," Revue économique, Presses de Sciences-Po, vol. 56(5), pages 1021-1032.
    3. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
    4. 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.
    5. 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.
    6. Sandrine Ollier, 2007. "On the generalized principal-agent problem: a comment," Review of Economic Design, Springer;Society for Economic Design, vol. 11(1), pages 1-11, June.
    7. 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.
    8. 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.
    9. Sandrine Ollier, 2007. "On the generalized principal-agent problem: a comment," Post-Print hal-00447191, HAL.
    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.

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