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Incentive compatibility and differentiability: New results and classic applications


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


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.

Suggested Citation

  • Mailath, George J. & von Thadden, Ernst-Ludwig, 2013. "Incentive compatibility and differentiability: New results and classic applications," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1841-1861.
  • Handle: RePEc:eee:jetheo:v:148:y:2013:i:5:p:1841-1861 DOI: 10.1016/j.jet.2013.07.004

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    References listed on IDEAS

    1. Mailath, George J. & Nöldeke, Georg, 2008. "Does competitive pricing cause market breakdown under extreme adverse selection?," Journal of Economic Theory, Elsevier, vol. 140(1), pages 97-125, May.
    2. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    3. 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.
    4. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    5. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
    6. 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.
    7. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
    8. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    9. 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 211-235, April.
    10. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    11. Kartik, Navin & Ottaviani, Marco & Squintani, Francesco, 2007. "Credulity, lies, and costly talk," Journal of Economic Theory, Elsevier, vol. 134(1), pages 93-116, May.
    12. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
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    Cited by:

    1. Mike Burkart & Samuel Lee, 2016. "Smart Buyers," Review of Corporate Finance Studies, Oxford University Press, vol. 5(2), pages 239-270.
    2. Lee J. & Müller R.J. & Vermeulen A.J., 2014. "Separating equilibrium in quasi-linear signaling games," Research Memorandum 026, Maastricht University, Graduate School of Business and Economics (GSBE).

    More about this item


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

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading


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