SFB 303 Discussion Paper No. A - 189
Author: Jost, Peter-Jürgen
Title: Adverse Selection in Moral Hazard Situations
Abstract: We extend the principal-agent framework with moral hazard to situations in which the agent has private
information upon his ability. Moreover, the principal has the possibility to control the agent's behavior at a fixed
positive cost. We analyze this relationship as a non-cooperative game with two players and apply the solution
concept of sequential equilibria. We show that in equilibrium an agent signals his ability by means of his choice
among a set of contracts. Finally, we investigate the shape of this self-selection device.
Creation-Date: July 1988
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