We develop a pure moral hazard model, and a closely related hybrid one, where there are both hidden actions and hidden information, to derive the restrictions from optimal contract theory that characterize set identification. In pure moral hazard models, the expected utility of managers is equalized across states, whereas in a hybrid model the optimal contract equates the expected utility of truth telling with the expected utility of lying. These restrictions are testable. Our identi…cation analysis establishes sharp and tight bounds on the identified set. Our tests and estimators are based on these bounds. We apply semiparametric methods to test the models, estimate the structural parameters, and quantify the effects of hidden actions versus hidden information. The pure moral hazard model is rejected on a large panel data set measuring the compensation of chief executive officers and the …financial and accounting returns of the publicly traded …firms they manage. We do not, however, reject the restrictions of the hybrid model, and our structural estimates for that model show the degree of private information varies considerably across sectors and over fi…rm size.

This paper develops a generalized Roy model with human capital accumulation, moral hazard, and career concerns. We identify and estimate the model with a large panel that matches data on publicly listed firms to information on their executives. The structural estimates obtained are used to decompose the firm‐size pay gap. We find that although total compensation and incentive pay increase with firm size, certainty‐equivalent pay decreases with firm size. In larger firms, and for more highly ranked executives, weaker signal quality about effort results in higher risk premiums. This risk premium accounts for roughly 80 percent of the firm‐size gap in total compensation. Larger firms are also willing to pay more than smaller ones to attract executives. Finally, the estimated coefficients on human capital accumulation from formal education and experience gained from different firms are individually significant, but their collective effect on firm‐size pay differentials nets out.