PRINCIPALS COMPETING FOR AN AGENT IN THE PRESENCE OF ADVERSE SELECTION AND MORAL HAZARD

This paper analyzes competition between two principals for the exclusive services of an agent of unknown ability. The principals differ in their marginal and average valuations for the agent’s input. They compete by offering menus of incentive contracts. A prominent feature of the equilibrium when neither principal fully dominates is that they both offer identical pooling contracts to an interval of intermediate-ability types. All these types supply a constant input level, receive the same monetary rewards, and yield zero profits to the principals. In addition, the effort of low-ability types is greater than the efficient level and welfare may be lower than if there was only one principal. Journal of Economic Literature Classification Numbers: D82, C72. © 1993 by Academic Press, Inc.