Screening Risk Averse Agents Under Moral Hazard

Jullien, Bruno; Salanie, Bernard; Salanié, François

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Screening Risk Averse Agents Under Moral Hazard

36 Pages Posted: 11 Dec 2001

See all articles by Bruno Jullien

Bruno Jullien

University of Toulouse 1 - Toulouse School of Economics (TSE); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Bernard Salanie

Columbia University - Graduate School of Arts and Sciences - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

François Salanié

National Institute for Agricultural Research (INRA); University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: October 2001

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 insurance, managerial incentive pay and corporate governance.

Keywords: Contracts, insurance

JEL Classification: D82

Suggested Citation: Suggested Citation

Jullien, Bruno and Salanie, Bernard and Salanie, Francois, Screening Risk Averse Agents Under Moral Hazard (October 2001). Available at SSRN: https://ssrn.com/abstract=293624