Adverse selection and moral hazard with risk neutral agents

Abstract

This paper surveys some recent developments of the literature on adverse selection and moral hazard in agency problems. It is concerned with the case where both aspects coexist and both agents are income risk-neutral. It shows that in most cases, the moral hazard aspect does not entail welfare losses compared to the pure adverse selection case. It moreover analyses different ways (using a single contract or a family of contracts) of deriving the optimal contracts from the optimal ‘pure’ adverse selection solution.