Delegating a risky activity via incentive contracts and liability insurance

We examine the importance of agents' private information about their occident proneness and action, when the principal delegates - via an optimal auction - the undertaking of a risky activity to an agent. A unique feature of our model is that the risk-neutral principal can provide, at no cost, competitively priced liability insurance to the "winning" risk-neutral agent in order to mitigate their expected cost of delegation. We show that the principal's provision of free coverage has a two-sided effect: the social cost of the risky activity increases, while the principal's informational rent payment to the winning agent decreases.