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Screening risk-averse agents under moral hazard: single-crossing and the CARA case

Bruno Jullien, Bernard Salanié and François Salanié
Economic Theory
Vol. 30, No. 1 (January 2007), pp. 151-169
Published by: Springer
Stable URL: http://www.jstor.org/stable/27822466
Page Count: 19
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Screening risk-averse agents under moral hazard: single-crossing and the CARA case
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Abstract

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 testing for asymmetric information in insurance markets.

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