Adverse Selection in Dynamic Moral Hazard.

This paper studies a multiperiod moral hazard problem under two assumptions: (1) contracts are subject to renegotiations and (2) the agent's action has long-term effects. The action is also interpreted as a choice of characteristic or "type." Renegotiation-proof contracts that implement various actions, including random ones, are characterized. Under appropriate conditions, the equilibrium involves the principal implementing a random action. Therefore, the equilibrium has standard properties of "adverse selection" models. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.