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Optimal contracts under moral hazard, adverse selection and limited liability

Author

Listed:
  • David Martimort

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Jean-Christophe Poudou

    (Unknown)

  • Lionel Thomas

    (Unknown)

Abstract

This paper studies optimal contracting between a risk-neutral buyer and a risk-neutral, limited-liability seller facing both adverse selection and moral hazard. Even when effort and production are separable, the optimal contract combines features of pure screening and pure moral hazard models. Screening distortions are mitigated, and effort serves as a screening tool. Efficient agents may attain near-first-best effort, while inefficient ones face greater distortions. The framework applies broadly to procurement, regulation, financial contracting, service quality, and price discrimination contexts.

Suggested Citation

  • David Martimort & Jean-Christophe Poudou & Lionel Thomas, 2026. "Optimal contracts under moral hazard, adverse selection and limited liability," Working Papers hal-04991014, HAL.
    • Handle: RePEc:hal:wpaper:hal-04991014
    Note: View the original document on HAL open archive server: https://hal.science/hal-04991014v3
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    Cited by:

    1. is not listed on IDEAS
    2. Luca Di Corato & Michele Moretto, 2026. "Dynamic Adverse Selection with Flow Limited Liability: A Closed-Form Approach to Price Regulation," Working Papers 2026.09, Fondazione Eni Enrico Mattei.

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    JEL classification:

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

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