Adverse selection and moral hazard in government grant giving

Abstract

The purpose of this paper is to relate problems of asymmetric information to government grant giving. The innovation in the paper is to extend the asymmetricity to both principal (donor/government) and agent (recipient) unlike conventional models which analyse informational asymmetries emanating solely from the agent. The first model (adverse selection) in the paper has more than one type of principal, as in the common agency problem. In the second model (moral hazard) we extend difficulties of monitoring the agent's effort to the principal as well, hence we have double moral hazard.