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Incentive compatibility and differentiability: New results and classic applications

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  • Mailath, George J.
  • von Thadden, Ernst-Ludwig

Abstract

We provide several generalizations of Mailathʼs (1987) [9] result that in games of asymmetric information with a continuum of types incentive compatibility plus separation implies differentiability of the informed agentʼs strategy. The new results extend the theory to classic models in finance such as Leland and Pyle (1977) [8], Glosten (1989) [4], and DeMarzo and Duffie (1999) [3], that were not previously covered.

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Bibliographic Info

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

Volume (Year): 148 (2013)
Issue (Month): 5 ()
Pages: 1841-1861

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Handle: RePEc:eee:jetheo:v:148:y:2013:i:5:p:1841-1861

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

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Keywords: Adverse selection; Separation; Differentiable strategies; Incentive-compatibility;

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  1. Hellwig, Martin, 1992. "Fully revealing outcomes in signalling models: An example of nonexistence when the type space is unbounded," Journal of Economic Theory, Elsevier, vol. 58(1), pages 93-104, October.
  2. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  3. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
  4. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  5. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-65, November.
  6. Glosten, Lawrence R, 1989. "Insider Trading, Liquidity, and the Role of the Monopolist Specialist," The Journal of Business, University of Chicago Press, vol. 62(2), pages 211-35, April.
  7. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  8. George J. Mailath & Georg Noldeke, 2007. "Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection?," PIER Working Paper Archive 07-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  10. Kartik, Navin & Ottaviani, Marco & Squintani, Francesco, 2007. "Credulity, lies, and costly talk," Journal of Economic Theory, Elsevier, vol. 134(1), pages 93-116, May.
  11. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
  12. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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