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Screening Risk Averse Agents Under Moral Hazard

Author

Listed:
  • Jullien, Bruno
  • Salanié, François
  • Salanié, Bernard

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.

Suggested Citation

  • Jullien, Bruno & Salanié, François & Salanié, Bernard, 2001. "Screening Risk Averse Agents Under Moral Hazard," CEPR Discussion Papers 3076, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3076
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    Cited by:

    1. De Donder, Philippe & Hindriks, Jean, 2006. "Does Propitious Selection Explain Why Riskier People Buy Less Insurance?," CEPR Discussion Papers 5640, C.E.P.R. Discussion Papers.
    2. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    3. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
    4. Pau Olivella & Fred Schroyen, 2014. "Multidimensional Screening in a Monopolistic Insurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(1), pages 90-130, March.
    5. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
    6. Nick Netzer & Florian Scheuer, 2006. "Competitive Screening in Insurance Markets with Endogenous Labor Supply," Discussion Papers of DIW Berlin 614, DIW Berlin, German Institute for Economic Research.
    7. Claudia Olivetti & Stefania Albanesi, 2005. "Home Production, Market Production and the Gender Wage Gap: Incentives and Expectations," Boston University - Department of Economics - Working Papers Series WP2005-013, Boston University - Department of Economics.
    8. Grund, Christian & Sliwka, Dirk, 2006. "Performance Pay and Risk Aversion," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 101, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    9. Nick Netzer & Florian Scheuer, 2010. "Competitive screening in insurance markets with endogenous wealth heterogeneity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(2), pages 187-211, August.
    10. Koufopoulos, Kostas, 2002. "Asymmetric information, heterogeneity in risk perceptions and insurance: an explanation to a puzzle," LSE Research Online Documents on Economics 24906, London School of Economics and Political Science, LSE Library.
    11. Bidénam Kambia-Chopin, 2003. "Coûts de l’autoprotection et équilibre d’un marché de l’assurance concurrentiel," L'Actualité Economique, Société Canadienne de Science Economique, vol. 79(3), pages 327-347.
    12. David M. Cutler & Amy Finkelstein & Kathleen McGarry, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," American Economic Review, American Economic Association, vol. 98(2), pages 157-162, May.
    13. Koufopoulos, Kostas, 2007. "On the positive correlation property in competitive insurance markets," Journal of Mathematical Economics, Elsevier, vol. 43(5), pages 597-605, June.
    14. Kiil, Astrid, 2012. "Private health insurance and the use of health care services - a review of the theoretical literature with application to voluntary private health insurance in universal health care systems," DaCHE discussion papers 2012:1, University of Southern Denmark, Dache - Danish Centre for Health Economics.
    15. repec:dau:papers:123456789/5370 is not listed on IDEAS
    16. Christopher S. Armstrong & David F. Larcker & Che-Lin Su, 2010. "Endogenous Selection and Moral Hazard in Compensation Contracts," Operations Research, INFORMS, vol. 58(4-part-2), pages 1090-1106, August.
    17. Pierre-André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory : A Survey of Some Recent Work," Working Papers 2002-11, Center for Research in Economics and Statistics.
    18. repec:mea:meawpa:12259 is not listed on IDEAS
    19. Amy Finkelstein & Kathleen McGarry, 2003. "Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance," NBER Working Papers 9957, National Bureau of Economic Research, Inc.
    20. Amy Finkelstein & James Poterba, 2014. "Testing for Asymmetric Information Using “Unused Observables” in Insurance Markets: Evidence from the U.K. Annuity Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(4), pages 709-734, December.

    More about this item

    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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