Working Papers

Abstract:    We study a moral hazard problem with adverse selection in which a risk-neutral agent can directly control the output distribution and possesses private information about the production environment. The principal designs a menu of contracts, subject to limited liability, to motivate the agent to exert effort. Departing from classical models, the principal not only induces specific levels of effort by designing the "power" of the contracts but also regulates the supports of the implemented output distributions through shaping the "range" of the contracts. We characterize the set of output distributions that can be implemented in this environment. Our results show that it is either optimal for the principal to provide a single full-range contract, or the optimal low-type contract range excludes some high outputs, or the optimal high-type contract range excludes some low outputs. We provide sufficient and necessary conditions on when a single full-range contract is optimal under convex effort functions, and show that this condition remains sufficient with general effort functions.