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On the design of incentive schemes under moral hazard and adverse selection
Affiliation:1. Imperial College Business School, London, UK;2. Ofcom, UK;1. National Research Nuclear University “MEPhI”, Kashirskoe shosse, 31, Moscow, Russia;2. Istituto Nazionale di Fisica Nucleare, Sezione di Trieste and Physics Department of University of Trieste, Trieste, Italy;3. Lebedev Physical Institute, Russian Academy of Sciences, Leninskij Prospekt, 53, Moscow, Russia;4. Istituto Nazionale di Fisica Nucleare, Sezione di Firenze and Physics Department of University of Florence, Firenze, Italy;5. Ioffe Physical Technical Institute, Russian Academy of Sciences, Polytekhnicheskaya, 26, St Petersburg, Russia;6. Stockholm University, Department of Physics; and the Oskar Klein Centre, AlbaNova University Center, Stockholm, Sweden;7. Department of Physical Sciences, Earth and Environment, University of Siena and Istituto Nazionale di Fisica Nucleare, Sezione di Pisa, Pisa, Italy;8. Scientific Research Institute for System Analysis, Russian Academy of Sciences, Moscow, Russia;9. Istituto di Fisica Applicata Nello Carrara – CNR and Istituto Nazionale di Fisica Nucleare, Sezione di Firenze, Firenze, Italy;10. Istituto Nazionale di Fisica Nucleare, Sezione di Pavia, Pavia, Italy;11. Istituto Nazionale di Fisica Nucleare, Sezione di Roma 2 and Physics Department of University of Rome Tor Vergata, Rome, Italy;12. Taras Shevchenko National University of Kyiv, Kyiv, Ukraine;13. Lviv Center of Institute of Space Research, Lviv, Ukraine;14. KTH Royal Institute of Technology, Department of Physics; and the Oskar Klein Centre, AlbaNova University Center, Stockholm, Sweden;15. CRESST/GSFC and University of Maryland, College Park, MA, USA;p. Hansen Experimental Physics Laboratory and Kavli Institute for Particle Astrophysics and Cosmology, Stanford University, Stanford, USA;q. Istituto Nazionale di Astrofisica IASF and Physics Department of University of Rome Tor Vergata, Rome, Italy;r. Pushkov Institute of Terrestrial Magnetism, Ionosphere, and Radiowave Propagation, Troitsk, Moscow Region, Russia
Abstract:This paper characterizes a class of optimal incentive schemes in a simple principal–agent model which allows for moral hazard and adverse selection. We show that incentive compatible allocation can always be (approximately) implemented through a menu of quadratic incentive schemes. It is also proved that the set of incentive compatible allocations is independent of the distribution of the additive uncertainty which affects the outcome. Informational requirements and economic interpretation of quadratic and linear schemes are discussed.
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