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Screening Risk Averse Agents Under Moral Hazard

  • Jullien, Bruno
  • Salanié, Bernard
  • Salanié, François

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3076.

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Date of creation: Oct 2001
Date of revision:
Handle: RePEc:cpr:ceprdp:3076
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  15. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 653-691, August.
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  18. Hemenway, David, 1992. " Propitious Selection in Insurance," Journal of Risk and Uncertainty, Springer, vol. 5(3), pages 247-51, July.
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