Economics - Research Publications

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Non-monotone incentives in a model ofcoexisting hidden action and hidden information

Basov, S. ( 2006-12)

In this paper I consider a model of coexisting moral hazard andadverse selection, similar to one considered by Guesnerie, Picard, and Rey(1989). I provide an explicit solution for the optimal incentive scheme in thecase, when the effort is observed with a normally distributed error. The mainobservation is that in this case the optimal incentive scheme often fails tobe monotone. If the monotonicity constraint is imposed on the solution foreconomic reasons there would exist a region of profit realizations, such thatthe optimal compensation will be independent of on performance.Keywords and Phrases: hidden action, hidden information, Fredholmintegral equations of the first type, Hermit polynomials.
Quality Gaps

Basov, S. ( 2006-06)

In this paper I consider a monopolistic screening model withcontinuum of types when the type set is a disconnected subset of the realline. I prove that the product line remains connected provided that the gapin the type space is sufficiently small. I also use the results to show that theinverse screening problem may be ill-defined.