Observational Equivalence of Managerial Contracts Under Conditions of Moral Hazard and Self-Selection

Managerial contracts often tie compensation to the performance of the firm. Two models of contracting under asymmetric information, moral hazard, and self-selection, are used to explain this phenomenon. An important direction for research in this area will be to use data on managerial contracts to sharpen our understanding of the settings in which a given informational problem is most important. The purpose of this paper is to ask whether this is possible using static models of contracting under asymmetric information. To address this question, we compare the standard principal-agent model presented by Grossman and Hart [1983] with a plausible self-selection model, where the firm only wants to hire a manager with a particular level of productivity. We call this self-selection model a talent search .