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Adverse Selection Problems without The Spence-Mirrlees Condition

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  • Araújo, Aloísio Pessoa de
  • Moreira, Humberto Ataíde

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

Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 425.

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Date of creation: 01 Jun 2001
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Handle: RePEc:fgv:epgewp:425

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Cited by:
  1. Hoffmann, Florian & Inderst, Roman, 2011. "Pre-sale information," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(6), pages 2333-2355.
  2. Boone, J. & Schottmuller, C., 2011. "Procurement with Specialized Firms," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2011-054, Tilburg University, Tilburg Law and Economic Center.
  3. Aloisio Araujo & Luciano I. de Castro Filho, 2004. "Pure Strategy Equilibria of Multidimensional and Non-Monotonic Auctions," Econometric Society 2004 Latin American Meetings, Econometric Society 300, Econometric Society.
  4. Aloisio Araujo & Luciano I. de Castro & Humberto Moreira, 2006. "Non-Monotoniticies And The All-Pay Auction Tie-Breaking Rule," Economics Working Papers, Universidad Carlos III, Departamento de Economía we065924, Universidad Carlos III, Departamento de Economía.
  5. Noldeke,G. & Samuelson,L., 2004. "Decomposable principal-agent problems," Working papers, Wisconsin Madison - Social Systems 14, Wisconsin Madison - Social Systems.
  6. Philippe Choné & Stéphane Gauthier, 2014. "Optimal Rationing within a Heterogenous Population," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 14032, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  7. Araujo, Aloisio & Moreira, Humberto & Tsuchida, Marcos, 2011. "Do dividend changes signal future earnings?," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 20(1), pages 117-134, January.
  8. Yona Rubinstein & James J. Heckman, 2001. "The Importance of Noncognitive Skills: Lessons from the GED Testing Program," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 145-149, May.
  9. Alós-Ferrer, Carlos & Prat, Julien, 2008. "Job Market Signaling and Employer Learning," IZA Discussion Papers, Institute for the Study of Labor (IZA) 3285, Institute for the Study of Labor (IZA).
  10. Tsuchida, Marcos H. & Araújo, Aloísio Pessoa de & Moreira, Humberto Luiz Ataide, 2004. "The trade-off between incentives and endogenous risk," Economics Working Papers (Ensaios Economicos da EPGE), FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) 523, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  11. 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), FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) 553, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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