The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent (Q1651880)
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scientific article; zbMATH DE number 6901022
| Language | Label | Description | Also known as |
|---|---|---|---|
| English | The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent |
scientific article; zbMATH DE number 6901022 |
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The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent (English)
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10 July 2018
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Summary: This paper studies the optimal contract offered by a risk-neutral principal to a risk-averse agent when the agent's hidden ability and action both improve the probability of the project being successful. We show that if the agent is sufficiently prudent and able, the principal induces a higher probability of success than under moral hazard, despite the costly informational rent given up. Moreover, there is distortion at the top. Finally, 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.
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adverse selection
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moral hazard
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risk aversion
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prudence
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