We characterize the optimal incentive scheme for a manager who faces costly effort decisions and whose ability to generate profits for the firm varies stochastically over time. The optimal contract is obtained as the solution to a dynamic mechanism design problem with hidden actions and...

The size of adverse selection and moral hazard eects in health insurance markets has important policy implications. For example, if adverse selection eects are small while moral hazard eects are large, conventional remedies for ineciencies created by adverse selection (e.g., mandatory insurance...

The size of adverse selection and moral hazard eects in health insurance markets has important policy implications. For example, if adverse selection eects are small while moral hazard eects are large, conventional remedies for ineciencies created by adverse selection (e.g., mandatory insurance...