Dynamic contracts with moral hazard and adverse selection
Dynamic contracts with moral hazard and adverse selection
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.
268-306
Gershkov, Alex
214a0b5e-c742-486d-b910-c8ec702c943a
Perry, Motty
4fd0d201-4eab-4052-9943-59b1dd407948
13 September 2011
Gershkov, Alex
214a0b5e-c742-486d-b910-c8ec702c943a
Perry, Motty
4fd0d201-4eab-4052-9943-59b1dd407948
Gershkov, Alex and Perry, Motty
(2011)
Dynamic contracts with moral hazard and adverse selection.
The Review of Economic Studies, 79 (1), .
(doi:10.1093/restud/rdr026).
Abstract
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.
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Accepted/In Press date: 1 June 2011
Published date: 13 September 2011
Identifiers
Local EPrints ID: 503657
URI: http://eprints.soton.ac.uk/id/eprint/503657
ISSN: 0034-6527
PURE UUID: 81cfe2e3-5601-4f25-a78d-607daa9eb076
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Date deposited: 08 Aug 2025 16:31
Last modified: 09 Aug 2025 02:19
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Contributors
Author:
Alex Gershkov
Author:
Motty Perry
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