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Adverse selection problems without the Spence-Mirrlees condition

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  • Araujo, Aloisio
  • Moreira, Humberto

Abstract

This paper studies a class of one-dimensional screening problems where the agent's utility function does not satisfy the Spence-Mirrlees condition (SMC). The strength of the SMC for hidden information problems is to provide a full characterization of implementable contracts using only the local incentive compatibility (IC) constraints. These constraints are equivalent to the monotonicity of the decision variable with respect to the agent's unobservable one-dimensional parameter. When the SMC is violated the local IC constraints are no longer sufficient for implementability and additional (global) IC constraints have to be taken into account. In particular, implementable decisions may not be monotonic and discretely pooled types must have the same marginal utility of the decision (or equivalently, get the same marginal tariff). Moreover, at the optimal decision, the principal must preserve the same trade-off between rent extraction and allocative distortion measured in the agent's marginal rent unit. In a specific setting where non-monotone contracts may be optimal we fully characterize the solution.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 3 (May)
Pages: 1113-1141

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:3:p:1113-1141

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Spence-Mirrlees condition Global incentive compatibility U-shaped condition Discrete pooling;

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Cited by:
  1. Georg Noldeke & Larry Samuelson, 2004. "Decomposable Principal-Agent Problems," Microeconomics 0410004, EconWPA.
  2. Araujo, Aloisio & Moreira, Humberto & Tsuchida, Marcos, 2011. "Do dividend changes signal future earnings?," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 117-134, January.
  3. Aloisio Araujo & Luciano I. de Castro & Humberto Moreira, 2006. "Non-Monotoniticies And The All-Pay Auction Tie-Breaking Rule," Economics Working Papers we065924, Universidad Carlos III, Departamento de Economía.
  4. Aloisio Araujo & Humberto Moreira, 2004. "The trade-off between incentives and endogenous risk," Econometric Society 2004 North American Summer Meetings 371, Econometric Society.
  5. Hoffmann, Florian & Inderst, Roman, 2011. "Pre-sale information," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2333-2355.
  6. Philippe Choné & Stéphane Gauthier, 2014. "Optimal Rationing within a Heterogeneous Population," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00983063, HAL.
  7. Yona Rubinstein & James J. Heckman, 2001. "The Importance of Noncognitive Skills: Lessons from the GED Testing Program," American Economic Review, American Economic Association, vol. 91(2), pages 145-149, May.
  8. Gottlieb, Daniel & Moreira, Humberto Ataíde & Araújo, Aloísio Pessoa de, 2004. "A model of mixed signals with applications to countersignaling an the GED," Economics Working Papers (Ensaios Economicos da EPGE) 553, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  9. Boone, J. & Schottmuller, C., 2011. "Procurement with Specialized Firms," Discussion Paper 2011-054, Tilburg University, Tilburg Law and Economic Center.
  10. Moreira, Humberto Ataíde & Araújo, Aloísio Pessoa de & Castro Filho, Luciano I. de Castro Filho, 2004. "Pure strategy equilibria of multidimensional and Non-monotonic auctions," Economics Working Papers (Ensaios Economicos da EPGE) 571, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  11. Alós-Ferrer, Carlos & Prat, Julien, 2008. "Job Market Signaling and Employer Learning," IZA Discussion Papers 3285, Institute for the Study of Labor (IZA).

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