Who and How? Adverse Selection and flexible Moral Hazard

Henrique Castro-Pires; Deniz Kattwinkel; Jan Knoepfle

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arXiv · 2506.12979

Who and How? Adverse Selection and flexible Moral Hazard

Henrique Castro-Pires·Deniz Kattwinkel·Jan Knoepfle

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Abstract

We characterize incentive compatible mechanisms in environments with hidden types and flexible hidden actions. Our approach introduces extended recommendation schedules that specify prescribed actions also off-path, after misreports. This approach yields a tractable and complete characterization of incentive compatibility, which includes a generalized integral monotonicity condition capturing the interaction between adverse selection and moral hazard. We demonstrate the usefulness of the characterization across a range of contracting problems.

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Henrique Castro-Pires, Deniz Kattwinkel, Jan Knoepfle. 2025-06-15. Who and How? Adverse Selection and flexible Moral Hazard. https://arxiv.org/abs/2506.12979

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