Incentives, Moral Hazard and Adverse Selection

Abstract

This paper proposes a model which analyses not only the provision of incentives (see, e.g., Gershkov et. al 2006 and Huck et al. 2001) and the moral hazard problem (see, e.g., Holmstrom 1982), but also the adverse selection problem (i.e. the workers are heterogeneous). Moreover, unlike the previous works, the paper introduces also the time dimension: we consider a firm with an infinite time horizon and individuals whose working life is split into two phases, the young phase and old phase. By comparing the results of the classical incentives scheme with those of a rewarding incentives scheme, we can conclude that this last scheme allows a higher production level.asymmetric information, incentives