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Dynamic Contracts with Moral Hazard and Adverse Selection

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  • Alex Gershkov
  • Motty Perry

Abstract

We study a novel dynamic principal--agent setting with moral hazard and adverse selection (persistent as well as repeated). In the model, an agent whose skills are his private information faces a finite sequence of tasks, one after the other. Upon arrival of each task, the agent learns its level of difficulty and then chooses whether to accept or refuse each task in turn and how much effort to exert. Although his decision to accept or refuse a task is publicly known, the agent's effort level is his private information. We characterize optimal contracts and show that the per-period utility of the agent approaches his per-period utility when his skills are publicly known, as the discount factor and the time horizon increase. Copyright 2012, Oxford University Press.

Suggested Citation

  • Alex Gershkov & Motty Perry, 2012. "Dynamic Contracts with Moral Hazard and Adverse Selection," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(1), pages 268-306.
    • Handle: RePEc:oup:restud:v:79:y:2012:i:1:p:268-306
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    File URL: http://hdl.handle.net/10.1093/restud/rdr026
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    Cited by:

    1. Zhiguo He & Bin Wei & Jianfeng Yu & Feng Gao, 2017. "Optimal Long-Term Contracting with Learning," The Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 2006-2065.
    2. Gershkov, Alex & Li, Jianpei & Schweinzer, Paul, 2016. "How to share it out: The value of information in teams," Journal of Economic Theory, Elsevier, vol. 162(C), pages 261-304.
    3. Alon Cohen & Moran Koren & Argyrios Deligkas, 2018. "Learning Approximately Optimal Contracts," Papers 1811.06736, arXiv.org, revised Jul 2022.
    4. Thomas Mettral, 2018. "Deterministic versus stochastic contracts in a dynamic principal-agent model," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(2), pages 209-218, October.
    5. Mettral, Thomas, 2018. "Deterministic versus Stochastic Contracts in a Dynamic Principal-Agent Model," Rationality and Competition Discussion Paper Series 93, CRC TRR 190 Rationality and Competition.
    6. Tan, Teck Yong, 2021. "Assignment under task dependent private information," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 632-645.

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