TY - JOUR
T1 - Disentangling Moral Hazard and Adverse Selection
AU - Castro-Pires, Henrique
AU - Chade, Hector
AU - Swinkels, Jeroen
N1 - Publisher Copyright:
© 2024 American Economic Association. All rights reserved.
PY - 2024/1
Y1 - 2024/1
N2 - While many real-world principal-agent problems have both moral hazard and adverse selection, existing tools largely analyze only one at a time. Do the insights from the separate analyses survive when the frictions are combined? We develop a simple method—decoupling—to study both problems at once. When decoupling works, everything we know from the separate analyses carries over, but interesting interactions also arise. We provide simple tests for whether decoupling is valid. We develop and numerically implement an algorithm to calculate the decoupled solution and check its validity. We also provide primitives for decoupling to work and analyze several extensions.
AB - While many real-world principal-agent problems have both moral hazard and adverse selection, existing tools largely analyze only one at a time. Do the insights from the separate analyses survive when the frictions are combined? We develop a simple method—decoupling—to study both problems at once. When decoupling works, everything we know from the separate analyses carries over, but interesting interactions also arise. We provide simple tests for whether decoupling is valid. We develop and numerically implement an algorithm to calculate the decoupled solution and check its validity. We also provide primitives for decoupling to work and analyze several extensions.
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U2 - 10.1257/aer.20220100
DO - 10.1257/aer.20220100
M3 - Article
AN - SCOPUS:85181511460
SN - 0002-8282
VL - 114
SP - 1
EP - 37
JO - American Economic Review
JF - American Economic Review
IS - 1
ER -