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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society
Compensation Disparity between Risk Averse Agents under Adverse Selection and Moral Hazard
Vol.32, No.2, June 2021, 74–91
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Sung Hyun Kim
(Ewha Womans University)
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Abstract
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.
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Keywords
Incentive Contract, Pay Gap, LEN Model |
JEL classification codes
D82, J31, M52 |
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