This paper studies a principal-agent model in which the principal and agent are risk-neutral, there are two actions, adverse selection, moral hazard and limited liability. When the two actions are subject to moral hazard, there is no distortion at the top, the optimal action profile is downward...

This paper develops a new rationale for the emergence of pay-for-performance contracts. The labor market is competitive, workers are risk averse and firms risk neutral. The paper shows that in stable environments more productive workers self-select into pay-for-performance jobs because risk is...