Adverse selection and bilateral asymmetric information

A simple principal-agent model with bilateral asymmetric information and common values is developed. The agent(s) has private information about his characteristics but does not knowhow these affect outcomes. The principal knows how the characteristics translate into outcomes, but does not observe the characteristics. It is shown that equilibrium contracts aresimple in being designednot to reveal the agent's characteristics. When the agent knows howsome of his characteristics affect the outcome, contracts will be differentiated with respect to precisely those characteristics. An application to the use of genetic information is considered.