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Optimal contract mechanisms for principal-agent problems with moral hazard and adverse selection. (English) Zbl 0810.90005

Summary: We examine the problem of incentive compatibility and mechanism design for incomplete information principal-agent problems. Allowing for risk aversion on the part of the principal and agent, we show the existence of an optimal incentive compatible contract selection mechanism for the principal under conditions of moral hazard and adverse selection. Since we assume that the contract set is a function space of state contingent contracts, and that the set of agent types is uncountable, the set of contract selection mechanisms becomes infinite dimensional. Hence, novel existence arguments are required. Our existence result extends those of S. J. Grossman and O. D. Hart [Econometrica 51, 7-45 (1983; Zbl 0503.90018)] and the author [J. Math. Econ. 16, 157-167 (1987; Zbl 0627.90001)] to an infinite dimensional setting with incomplete information.

MSC:

91B14 Social choice
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