Selecting an Agent's Ability by Tracy R. Lewis * and David E. M. Sappington** Revised March 1991 * University of California, Davis. ** University of Florida. Financial Support from the National Science Foundation, the University of California Energy Research Group, and the Public Utilities Research Center at the University of Florida is gratefully acknowledged. We also wish to thank Lome Carmichael, Curtis Eaton, Oliver Hart, William Rogerson, Thomas Ross, Pablo Spiller, Jean Tirole, Ralph Winter and seminar participants at U. C. Davis, Cal Tech, Carleton, Queens, Montreal, Toronto and Toulouse for helpful comments.