Abstract: The paper discusses the linearization of contracts and linear contracts in principal-agent relationships under asymmetric information.Our Starting point is the difference of capability between agents;therefore adverse selection and moral hazard coexist.To handle such a problem,we get a parametrized payment contract concave on output,linearize it,and in view of its instability substitute it with non-parametrized linear contracts,which is more approximate to realistic contracts.

Key words: linear contracts, principal-agent, adverse selection, moral hazard