ABSTRACT
This paper studies optimal contracting between a risk-neutral buyer and a risk-neutral, limited-liability seller facing both adverse selection and moral hazard. Even when effort and production are separable, the optimal contract combines features of pure screening and pure moral hazard models. Screening distortions are mitigated, and effort serves as a screening tool. Efficient agents may attain near-first-best effort, while inefficient ones face greater distortions. The framework applies broadly to procurement, regulation, financial contracting, service quality, and price discrimination contexts.
Martimort, David and Poudou, Jean-Christophe and Thomas, Lionel, Optimal Contracts under Moral Hazard, Adverse Selection and Limited Liability. Posted on SSRN 3 November 2025.
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