Ex post participation constraint in a principal-agent model with adverse selection and moral hazard

This paper analyzes optimal contracting when an agent has private information before contracting and exerts bidden effort that stochastically affects the output. Additionally, the contract is constrained to satisfy the agent's ex post participation. We highlight three features of this model. First, the agent faces countervailing incentives. Second, the separation of types is never optimal. Third, the optimal constant bonus rewarding success is distorted downward below its efficient level. (C) 2013 Elsevier Inc. All rights reserved.