Screening Risk Averse Agents Under Moral Hazard
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.
|Date of creation:||Oct 2001|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hayne E. Leland and David H. Pyle., 1976.
"Informational Asymmetries, Financial Structure, and Financial Intermediation,"
Research Program in Finance Working Papers
41, University of California at Berkeley.
- Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
- Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996.
"Income Risk, Borrowing Constraints, and Portfolio Choice,"
American Economic Review,
American Economic Association, vol. 86(1), pages 158-72, March.
- Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
- Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
- Faynzilberg, Peter S. & Kumar, Praveen, 1997. "Optimal Contracting of Separable Production Technologies," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 15-39, October.
- Brian J. Hall & Jeffrey B. Liebman, 1997.
"Are CEOs Really Paid Like Bureaucrats?,"
NBER Working Papers
6213, National Bureau of Economic Research, Inc.
- Hemenway, David, 1990. "Propitious Selection," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1063-69, November.
- Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
- Laffont, Jean-Jacques & Tirole, Jean, 1986.
"Using Cost Observation to Regulate Firms,"
Journal of Political Economy,
University of Chicago Press, vol. 94(3), pages 614-41, June.
- Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
- R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
- Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
- Jensen, M.C. & Murphy, K.J., 1988.
"Performance Pay And Top Management Incentives,"
88-04, Rochester, Business - Managerial Economics Research Center.
- Hemenway, David, 1992. " Propitious Selection in Insurance," Journal of Risk and Uncertainty, Springer, vol. 5(3), pages 247-51, July.
- Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-38, May.
- de Meza, David & Webb, David C, 2001.
"Advantageous Selection in Insurance Markets,"
RAND Journal of Economics,
The RAND Corporation, vol. 32(2), pages 249-62, Summer.
- Ian Jewitt, 1989. "Choosing Between Risky Prospects: The Characterization of Comparative Statics Results, and Location Independent Risk," Management Science, INFORMS, vol. 35(1), pages 60-70, January.
- Stewart, Jay, 1994. "The Welfare Implications of Moral Hazard and Adverse Selection in Competitive Insurance Markets," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 193-208, April.
- Jullien, Bruno, 1997.
"Participation Constraints in Adverse Selection Models,"
IDEI Working Papers
67, Institut d'Économie Industrielle (IDEI), Toulouse.
- Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
- David P. Baron & David Besanko, 1987. "Monitoring, Moral Hazard, Asymmetric Information, and Risk Sharing in Procurement Contracting," RAND Journal of Economics, The RAND Corporation, vol. 18(4), pages 509-532, Winter.
- Stiglitz, Joseph E, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 407-30, October.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3076. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.