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Screening Risk Averse Agents Under Moral Hazard

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  • Jullien, Bruno
  • Salanié, Bernard
  • Salanié, François

Abstract

Principal-agent models of moral hazard have been developed under the assumption that the principal knows the agent's risk-aversion. This Paper extends the moral hazard model to the case when the agent's risk-aversion is his private information, so that the model also exhibits adverse selection. We characterize the optimal menu of contracts; while its detailed properties depend on the setting, we show that some of them must hold for all environments. In particular, the power of incentives always decreases with risk-aversion. We also characterize the relationship between the outside option and the optimal contracts. We then apply our results to insurance, managerial incentive pay and corporate governance.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3076.

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Date of creation: Oct 2001
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Handle: RePEc:cpr:ceprdp:3076

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Keywords: contracts; insurance;

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References

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  1. Faynzilberg, Peter S. & Kumar, Praveen, 1997. "Optimal Contracting of Separable Production Technologies," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 15-39, October.
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  18. repec:fth:exetec:00/07 is not listed on IDEAS
  19. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
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