Abstract
The continuous-time adverse selection problems we consider can be transformed into calculus of variations problems on choosing the optimal expected utility for the agent. When the cost is quadratic, the optimal contract is typically a nonlinear function of the final output value and it may also depend on the underlying source of risk. With risk-neutral agent and principal, a range of lower type agents gets non-incentive cash contracts. As the cost of the effort gets higher, the non-incentive range gets wider, and only the highest type agents get informational rent. The rent gets smaller with higher values of cost, as do the incentives.
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Cvitanić, J., Zhang, J. (2013). Adverse Selection. In: Contract Theory in Continuous-Time Models. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-14200-0_8
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DOI: https://doi.org/10.1007/978-3-642-14200-0_8
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-14199-7
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