Optimal Incentive Wage Contracts under Adverse Selection and Moral Hazard

Abstract

In this paper, we study the problem in which a risk-neutral principal design optimal incentive wage contracts for a risk-averse agent under asymmetric information.Using the theories and methods of dynamic programming and optimal control and mechanism design,the characteristics and some interesting comparative static of optimal linear incentive wage contracts have been obtained in simultaneous adverse selection and moral hazard .we show that the higher the capacity of an agent, he was more hard work. Moreover,the optimal contract for the higher ability agent is higher energy incentive or higher risk for screening the ability of agents.