In the principal-agent model with adverse selection from Laffont and Martimort (2001) (20 mks)
(i) Write down the conditions for output produced by both types of agent to be socially valuable, and show that the principal prefers a higher equilibrium output from the efficient agent than the inefficient agent in the complete information contract.
(ii) What are the output levels desired by the principal from both types of agent when there is incomplete information about the agent’s type?
Sample Solution
