Journal Article

Dynamic Contracts with Moral Hazard and Adverse Selection

Alex Gershkov and Motty Perry

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 79, issue 1, pages 268-306
Published in print January 2012 | ISSN: 0034-6527
Published online September 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdr026
Dynamic Contracts with Moral Hazard and Adverse Selection

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  • Information, Knowledge, and Uncertainy
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We study a novel dynamic principal–agent setting with moral hazard and adverse selection (persistent as well as repeated). In the model, an agent whose skills are his private information faces a finite sequence of tasks, one after the other. Upon arrival of each task, the agent learns its level of difficulty and then chooses whether to accept or refuse each task in turn and how much effort to exert. Although his decision to accept or refuse a task is publicly known, the agent's effort level is his private information. We characterize optimal contracts and show that the per-period utility of the agent approaches his per-period utility when his skills are publicly known, as the discount factor and the time horizon increase.

Keywords: Adverse Selection; Moral hazard; D86; D04

Journal Article.  18747 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Microeconomics

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