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Adverse selection under ignorance

  • Javier M. LÕpez-Cunat


    (Department of Fundamentos del AnÂlisis EconÕmico, Alicante University, 03071 Alicante, SPAIN)

We examine an adverse selection relationship in which the principal may ignore the ex ante distribution of the agent's types. The principal's behavior is described by a disutility function that covers the standard minimax regret and minimax loss criteria. We show that the incentive compatible and individually rational mechanism, which minimizes the maximal (or the minimal) principal's disutility over a set of priors, requires the efficient agents to realize the corresponding first-best actions and may demand actions lower than the first-best ones from less efficient agents. We also analyze the qualitative differences between the case in which the principal considers regrets and the case in which he considers losses.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 16 (2000)
Issue (Month): 2 ()
Pages: 379-399

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Handle: RePEc:spr:joecth:v:16:y:2000:i:2:p:379-399
Note: Received: 19 October 1998; revised version: 9 November 1999
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