Optimal Incentive Mechanism Design under Adverse Selection and Moral Hazard

We investigate the design of optimal incentive mechanism under adverse selection and moral hazard with risk neutral principal and agents.The optimal incentive payment contract is derived.The interesting comparative statics of the optimal incentive contract are analyzed.First, we show that the optimal level of effort is an increasing function of the ability of agent and less than the one in symmetric information. Second, the optimal incentive wage contracts are Composed of a fixed income and performance related income. The fixed-income part of the optimal incentive contract is an increasing function of type. We also show that high ability agent obtain higher wage in success and lower one in failure than low ability agent for the performance related income.