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October 15, 2025Open Access

Who and How? Adverse Selection and flexible Moral Hazard

HCHenrique Castro-PiresUniversity of Miami DKDeniz KattwinkelUniversity of Bonn JKJan KnoepfleQueen Mary University of London

Key Points

This research characterizes incentive compatible mechanisms under conditions of hidden types and actions.
A generalized integral monotonicity condition is introduced to clarify interactions in these environments.
The study explores extended recommendation schedules that dictate actions post-misreporting for improved contract outcomes.
Findings underscore the significance of incentive compatibility in effectively managing contracting challenges.

Abstract

We characterize incentive compatible mechanisms in environments with hidden types and flexible hidden actions. Our approach introduces extended recommendation schedules that specify prescribed actions also off-path, after misreports. This approach yields a tractable and complete characterization of incentive compatibility, which includes a generalized integral monotonicity condition capturing the interaction between adverse selection and moral hazard. We demonstrate the usefulness of the characterization across a range of contracting problems.

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