Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/179172
Authors: 
Maréchal, François
Thomas, Lionel
Year of Publication: 
2018
Citation: 
[Journal:] Games [ISSN:] 2073-4336 [Volume:] 9 [Year:] 2018 [Issue:] 1 [Pages:] 1-22
Abstract: 
This paper studies the optimal contract offered by a risk-neutral principal to a risk-averse agent when the agent's hidden ability and action both improve the probability of the project being successful. We show that if the agent is sufficiently prudent and able, the principal induces a higher probability of success than under moral hazard, despite the costly informational rent given up. Moreover, there is distortion at the top. Finally, the conditions to avoid pooling are difficult to satisfy because of the different kinds of incentives to be managed and the overall trade-off between rent extraction, insurance, and efficiency involved.
Subjects: 
adverse selection
moral hazard
risk aversion
prudence
JEL: 
D82
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by/4.0/
Document Type: 
Article
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