Reference

Robert Ulbricht, Optimal Delegated Search with Adverse Selection and Moral Hazard, TSE Working Paper, n. 14-475, March 11, 2014.

Abstract

The paper studies a model of delegated search. The distribution of search revenues is unknown to the principal and has to be elicited from the agent in order to design the optimal search policy. At the same time, the search process is unobservable, requiring search to be self-enforcing. The two information asymmetries are mutually enforcing each other; if one is relaxed, delegated search is efficient. With both asymmetries prevailing simultaneously, search is almost surely inefficient (it is stopped too early). Second-best remuneration is shown to optimally utilize a menu of simple bonus contracts. In contrast to standard adverse selection problems, indirect nonlinear tarifs are strictly dominated.

Keywords

adverse selection; bonus contracts; delegated search; moral hazard; optimal stopping

JEL codes

  • C72: Noncooperative Games
  • D82: Asymmetric and Private Information • Mechanism Design
  • D83: Search • Learning • Information and Knowledge • Communication • Belief
  • D86: Economics of Contract: Theory

Robert Ulbricht, Optimal Delegated Search with Adverse Selection and Moral Hazard, Theoretical Economics, vol. 11, n. 1, January 2016, pp. 253–278.