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Epsilon-Efficiency in a Dynamic Partnership with Adverse Selection and Moral Hazard

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  • Cao Vi

    (School of Economics, Sichuan University, Chengdu, China)

Abstract

For a dynamic partnership with adverse selection and moral hazard, we design a direct profit division mechanism that satisfies ϵ-efficiency, periodic Bayesian incentive compatibility, interim individual rationality, and ex-post budget balance. In addition, we design a voting mechanism that implements the profit division rule associated with this direct mechanism in perfect Bayesian equilibrium. For establishing these possibility results, we assume that the partnership exhibits intertemporal complementarities instead of contemporaneous complementarities; equivalently, an agent’s current effort affects other agents’ future optimal efforts instead of current optimal efforts. This modelling assumption fits a wide range of economic settings.

Suggested Citation

  • Cao Vi, 2023. "Epsilon-Efficiency in a Dynamic Partnership with Adverse Selection and Moral Hazard," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 23(1), pages 73-119, January.
    • Handle: RePEc:bpj:bejtec:v:23:y:2023:i:1:p:73-119:n:11
    DOI: 10.1515/bejte-2020-0089
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