IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v148y2013i6p2383-2403.html
   My bibliography  Save this article

Ex post participation constraint in a principal–agent model with adverse selection and moral hazard

Author

Listed:
  • Ollier, Sandrine
  • Thomas, Lionel

Abstract

This paper analyzes optimal contracting when an agent has private information before contracting and exerts hidden effort that stochastically affects the output. Additionally, the contract is constrained to satisfy the agentʼs ex post participation. We highlight three features of this model. First, the agent faces countervailing incentives. Second, the separation of types is never optimal. Third, the optimal constant bonus rewarding success is distorted downward below its efficient level.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jetheo:v:148:y:2013:i:6:p:2383-2403
    DOI: 10.1016/j.jet.2013.07.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022053113001257
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jet.2013.07.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    2. Mark Bagnoli & Ted Bergstrom, 2006. "Log-concave probability and its applications," Studies in Economic Theory, in: Charalambos D. Aliprantis & Rosa L. Matzkin & Daniel L. McFadden & James C. Moore & Nicholas C. Yann (ed.), Rationality and Equilibrium, pages 217-241, Springer.
    3. Laffont, Jean-Jacques, 1995. "Regulation, moral hazard and insurance of environmental risks," Journal of Public Economics, Elsevier, vol. 58(3), pages 319-336, November.
    4. Morand Pierre-Henri & Thomas Lionel, 2003. "On Non-responsiveness in Adverse Selection Models with Common Value," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-15, August.
    5. B. Caillaud & R. Guesnerie & P. Rey & J. Tirole, 1988. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 1-26, Spring.
    6. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, December.
    7. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
    8. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
    9. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
    10. David E. M. Sappington & Tracy R. Lewis, 2000. "Motivating Wealth-Constrained Actors," American Economic Review, American Economic Association, vol. 90(4), pages 944-960, September.
    11. Stole, Lars A., 1994. "Information expropriation and moral hazard in optimal second-source auctions," Journal of Public Economics, Elsevier, vol. 54(3), pages 463-484, July.
    12. Leonid Hurwicz & Leonard Shapiro, 1978. "Incentive Structures Maximizing Residual Gain under Incomplete Information," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 180-191, Spring.
    13. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
    14. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    15. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
    16. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    17. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hiriart, Yolande & Thomas, Lionel, 2017. "The optimal regulation of a risky monopoly," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 111-136.
    2. Felipe Balmaceda, 2020. "Contracting with moral hazard, adverse selection and risk neutrality: when does one size fit all?," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(2), pages 601-637, June.
    3. 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.
    4. Martimort, David & Stole, Lars A., 2022. "Participation constraints in discontinuous adverse selection models," Theoretical Economics, Econometric Society, vol. 17(3), July.
    5. Indranil Chakraborty & Fahad Khalil & Jacques Lawarree, 2021. "Competitive procurement with ex post moral hazard," RAND Journal of Economics, RAND Corporation, vol. 52(1), pages 179-206, March.
    6. François Maréchal & Lionel Thomas, 2019. "The optimal payment system for hospitals under adverse selection, moral hazard, and limited liability," Working Papers 2019-04, CRESE.
    7. Daniel Danau & Annalisa Vinella, 2017. "Contractual design in agency problems with non-monotonic cost and correlated information," SERIES 02-2017, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Mar 2017.
    8. Guy Meunier & Jean-Pierre Ponssard, 2021. "Designing Conditional Schemes for Green Industrial Policy under Different Information Structures," CESifo Working Paper Series 8881, CESifo.
    9. Murali Agastya & Oleksii Birulin, 2023. "Optimal Task Scheduling under Adverse Selection and Hidden Actions," American Economic Journal: Microeconomics, American Economic Association, vol. 15(2), pages 660-698, May.
    10. David Rietzke & Yu Chen, 2020. "Push or pull? Performance‐pay, incentives, and information," RAND Journal of Economics, RAND Corporation, vol. 51(1), pages 301-317, March.
    11. Escobar, Juan F. & Pulgar, Carlos, 2017. "Motivating with simple contracts," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 192-214.
    12. Garrett, Daniel F. & Georgiadis, George & Smolin, Alex & Szentes, Balázs, 2023. "Optimal technology design," Journal of Economic Theory, Elsevier, vol. 209(C).
    13. Parimal K. Bag & Peng Wang, 2019. "Dominance of contributions monitoring in teams," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 53(3), pages 467-495, October.
    14. Lionel Thomas, 2016. "The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent," Working Papers hal-01374709, HAL.
    15. 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.
    16. Shuto Miyashita & Shogo Katoh & Tomohiro Anzai & Shintaro Sengoku, 2020. "Intellectual Property Management in Publicly Funded R&D Program and Projects: Optimizing Principal–Agent Relationship through Transdisciplinary Approach," Sustainability, MDPI, vol. 12(23), pages 1-17, November.
    17. Meunier Guy & Ponssard Jean-Pierre, 2017. "Financing innovative green projects with asymmetric information and costly public funds," Working Papers 2017-55, Center for Research in Economics and Statistics.
    18. Lionel Thomas, 2016. "The optimal contract under adverse selection in a moral-hazard model with a risk-averse agent," Working Papers 2016-09, CRESE.
    19. Roberto Sarkisian, 2021. "Screening Teams of Moral and Altruistic Agents," Games, MDPI, vol. 12(4), pages 1-11, October.
    20. François Maréchal & Lionel Thomas, 2018. "The Optimal Contract under Adverse Selection in a Moral-Hazard Model with a Risk-Averse Agent," Games, MDPI, vol. 9(1), pages 1-22, March.
    21. François Maréchal & Lionel Thomas, 2021. "The impact of medical complications on optimal hospital payment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(6), pages 1144-1173, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    2. Goldlücke, Susanne & Schmitz, Patrick W., 2018. "Pollution claim settlements reconsidered: Hidden information and bounded payments," European Economic Review, Elsevier, vol. 110(C), pages 211-222.
    3. 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.
    4. David Rietzke & Yu Chen, 2020. "Push or pull? Performance‐pay, incentives, and information," RAND Journal of Economics, RAND Corporation, vol. 51(1), pages 301-317, March.
    5. Quintero Jaramillo, Jose E., 2004. "Liquidity constraints and credit subsidies in auctions," DEE - Working Papers. Business Economics. WB wb040604, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    6. Jan Boone & Christoph Schottmüller, 2016. "Procurement with specialized firms," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 661-687, August.
    7. Brocas, Isabelle, 2014. "Countervailing incentives in allocation mechanisms with type-dependent externalities," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 22-33.
    8. Escobar, Juan F. & Pulgar, Carlos, 2017. "Motivating with simple contracts," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 192-214.
    9. Aguirre, Iñaki & Beitia, Arantza, 2017. "Modelling countervailing incentives in adverse selection models: A synthesis," Economic Modelling, Elsevier, vol. 62(C), pages 82-89.
    10. David Martimort & Jérôme Pouyet & Francesco Ricci, 2018. "Extracting information or resource? The Hotelling rule revisited under asymmetric information," RAND Journal of Economics, RAND Corporation, vol. 49(2), pages 311-347, June.
    11. Noldeke,G. & Samuelson,L., 2004. "Decomposable principal-agent problems," Working papers 14, Wisconsin Madison - Social Systems.
    12. Noldeke, Georg & Samuelson, Larry, 2007. "Optimal bunching without optimal control," Journal of Economic Theory, Elsevier, vol. 134(1), pages 405-420, May.
    13. Linda Fernandez & Glenn Sheriff, 2013. "Optimal Border Policies for Invasive Species Under Asymmetric Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(1), pages 27-45, September.
    14. repec:dau:papers:123456789/5993 is not listed on IDEAS
    15. Felipe Balmaceda, 2020. "Contracting with moral hazard, adverse selection and risk neutrality: when does one size fit all?," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(2), pages 601-637, June.
    16. Martimort, David & Stole, Lars, 2011. "Public Contracting in Delegated Agency Games," MPRA Paper 32874, University Library of Munich, Germany.
    17. Péter Eso & Balázs Szentes, 2004. "The Price of Advice," Discussion Papers 1416, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    18. Nicolas Gruyer, 2009. "Optimal Auctions When A Seller Is Bound To Sell To Collusive Bidders," Journal of Industrial Economics, Wiley Blackwell, vol. 57(4), pages 835-850, December.
    19. Schmitz, Patrick W., 2002. "On Monopolistic Licensing Strategies under Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 106(1), pages 177-189, September.
    20. Péter Eső & Balázs Szentes, 2007. "The price of advice," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 863-880, December.
    21. Gick, Wolfgang, 2015. "A Theory of Delegated Contracting," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113069, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Ex post participation; Adverse selection; Moral hazard; Countervailing incentives; Pooling contracts;
    All these keywords.

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:148:y:2013:i:6:p:2383-2403. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.