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Adverse Selection and Moral Hazard with Multidimensional Types

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  • Suehyun Kwon

Abstract

This paper studies a contracting problem where agents’ cost of actions is private information. With two actions, this leads to a two-dimensional screening problem with moral hazard. There is a natural one-dimensional ordering of types when there is both adverse selection and moral hazard. Regardless of the number of types, an optimal menu of contracts either pools every type together or offers a menu of two contracts. Any incentive-compatible menu of contracts has to satisfy pairwise single-crossing properties in incentivized actions and ex-ante utilities. The principal can no longer sell the firm to the agent.

Suggested Citation

  • Suehyun Kwon, 2017. "Adverse Selection and Moral Hazard with Multidimensional Types," CESifo Working Paper Series 6631, CESifo.
    • Handle: RePEc:ces:ceswps:_6631
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    References listed on IDEAS

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    1. Sylvain Chassang, 2013. "Calibrated Incentive Contracts," Econometrica, Econometric Society, vol. 81(5), pages 1935-1971, September.
    2. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    3. Andreas Asseyer, "undated". "Optimal monitoring in dynamic procurement contracts," BDPEMS Working Papers 2015002, Berlin School of Economics.
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    Keywords

    adverse selection; moral hazard; multidimensional types;
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