We extend the LEN moral hazard model to allow for adverse selection and derive the optimal incentive contract menu. We show that both moral hazard and adverse selection separately cause compensation disparity between agents with different degrees of risk aversion. We also show that adverse selection aggravates the compensation disparity when more risk averse agents form a minority of the agent population.
|Number of pages||18|
|Journal||Journal of Economic Theory and Econometrics|
|State||Published - Jun 2021|
Bibliographical notePublisher Copyright:
© 2021, Korean Econometric Society. All rights reserved.
- Incentive Contract
- LEN Model
- Pay Gap