Businesses can now maximize profits by exploiting information asymmetry in contracts.
The article explores how to create the best contracts for agents in a market with information imbalances. Two models are developed to tackle this issue: one focusing on adverse selection and the other on a mix of adverse selection and moral hazard. The research shows that in the first model, different contracts for different types of agents lead to optimal outcomes. In the mixed model, the type of contract depends on the likelihood of low-quality agents in the market. Overall, the study reveals that information gaps can impact the benefits high-quality agents receive.