Contracting with moral hazard, adverse selection and risk neutrality: when does one size fit all?

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4 Citations (Scopus)


This paper studies a principal-agent relationship when both are risk-neutral and in the presence of adverse selection and moral hazard. Contracts must satisfy the limited-liability and monotonicity conditions. We provide sufficient conditions under which the optimal contract is simple, in the sense that each type is offered the same contract. These are: the action and the agent’s type are complements, and the output’s cumulative distribution function is such that the marginal rate of substitution between the action and the agent’s type is the same for each possible output realization. Furthermore, under the average monotone likelihood ratio property, the optimal contract is a call-option contract as in Innes (J Econ Theory 52(1):45–67, 1990). The results shed light on the fact that sometimes contracts are not highly dependent on individual characteristics as predicted in most pure moral hazard and pure adverse selection settings.

Original languageEnglish
Pages (from-to)601-637
Number of pages37
JournalInternational Journal of Game Theory
Issue number2
Publication statusPublished - 1 Jun 2020
Externally publishedYes


  • Adverse selection
  • Limited liability
  • Monotonicity
  • Moral hazard
  • Optimal mechanism

ASJC Scopus subject areas

  • Statistics and Probability
  • Mathematics (miscellaneous)
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty


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