Simultaneous moral hazard and adverse selection with risk averse agents

While the existing literature assumes either agents to be risk neutral or information about the outcome to be perfect, in this paper we allow for risk averse agents and find an optimal contract scheme which is robust to errors on the distribution of outcome. The optimal payment contract is derived and the comparative statics of the optimal payment scheme are analyzed. As the main insight it is shown that in the presence of simultaneous moral hazard and adverse selection, the agent strictly prefers to relax the first of the two informational problems. (C) 2002 Elsevier Science B.V. All rights reserved.