Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

Optimal contracts under competition when uncertainty from adverse selection and moral hazard are present

Natalie Packham



Abstract
In a continuous-time setting where a risk-averse agent controls the drift of an output
process driven by a Brownian motion, optimal contracts are linear in the terminal output;
this result is well-known in a setting with moral hazard and – under stronger assumptions
– adverse selection. We show that this result continues to hold when in addition reser-
vation utilities are type-dependent. This type of problem occurs in the study of optimal
compensation problems involving competing principals.


Keywords:
Principal-agent modelling; contract design; stochastic process; stochastic control