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Screening Risk-Averse Agents Under Moral Hazard

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  • Bruno Jullien

    (Crest)

  • Bernard Salanié

    (Crest)

  • François Salanié

    (Crest)

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 Centre de Recherche en Economie et Statistique in its series Working Papers with number 2000-41.

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Date of creation: 2000
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Handle: RePEc:crs:wpaper:2000-41

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