We introduce that the principal and the agent can contract at the ex ante stage, and allow for risk-averse agents with inequity aversion to analyse the properties of the optimal incentive scheme under adverse selection. Contrary to the solutions of standard adverse selection problems, our main...

To examine the effects of peer pressure in adverse selection problem, we define a peer pressure function that represents the psychological costs and incorporate it into the agent's utility function. Based on these assumptions, the efficient agent who has conformity preference produces less...