Abstract: Considering the problems of bilateral moral hazard and adverse selection in collaborative services, an adverse selection model based on principal-agent theory is proposed to reveal the actual ability of the service provider. The research conclusions indicate that the optimal menu of contracts is able to credibly identify the service provider’s type and could motivate the involved parties to work diligently. Furthermore, the analyses show that in the condition of asymmetric information, the service provider with high ability gets extra information rents and the customer suffers losses due to the inferior position of information. Finally, the results demonstrate that under symmetric information, the sharing ratio of service providers is only dependent on the output sensitivity to the effort of collaborative parties. However, under asymmetric information, the sharing ratio for the service provider with the high ability remains unchanged, and the sharing ratio for the service provider with the low ability is distorted downward and affected by both the ability ratio of the two types of service providers and the ex ante belief of customers.

Key words: service, joint production, contract design, bilateral moral hazard, adverse selection