Contracts under Moral Hazard and Adverse Selection

Abstract

In the classical principal-agent problem, a principal must design a contract to incentivize an agent to perform an action on behalf of the principal. We study the classical principal-agent problem in a setting where the agent can be of one of several types (affecting the outcome of actions they might take). This combines the contract theory phenomena of "moral hazard" (incomplete information about actions) with that of "adverse selection" (incomplete information about types).