Take Action

Home | Faculty & Research Overview | Research

Research Details

Disentangling Moral Hazard and Adverse Selection

Abstract

We analyze a canonical principal-agent problem with both moral hazard and adverse selection. We derive sufficient conditions for a menu of contracts to be feasible. We then provide a method of solution, which we call decoupling. It consists of first minimizing the cost of implementing any given action at any given surplus for any given type in a pure moral hazard problem, and then use the resulting cost function as an input to a pure adverse-selection problem. We show broad classes of primitives under which the solution to this radically simplified program is indeed optimal in the full problem. Decoupling has powerful implications for the structure of optimal menus. We illustrate our results in the context of an insurance market.

Type

Working Paper

Author(s)

Jeroen Swinkels, Hector Chade

Date Published

2019

Citations

Swinkels, Jeroen, and Hector Chade. 2019. Disentangling Moral Hazard and Adverse Selection.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more

Take Action