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Adverse selection problems without the Spence-Mirrlees condition

Listed author(s):
  • Aloisio Araújo
  • Humberto Moreira

    ()

    (Department of Economics PUC-Rio)

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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File URL: http://www.econ.puc-rio.br/pdf/td424.pdf
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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 424.

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Length: 56 pages
Date of creation: May 2000
Handle: RePEc:rio:texdis:424
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