An Adverse Selection Model with Finite Number of Types and Informational Rents

Daniela Elena Marinescu (), Ioana Manafi (Râmniceanu) and Dumitru Marin ()
Additional contact information
Daniela Elena Marinescu: Bucharest Academy of Economic Studies
Dumitru Marin: Bucharest Academy of Economic Studies

International Journal of Economic Practices and Theories, 2012, vol. 2, issue 3, 99-108

Abstract: In the paper we analyze a contractual relationship between two economic agents using a standard Principal-Agent approach from the theory of incentives. The Principal wants to delegate a production activity to an Agent privately informed about his marginal cost of production. This problem corresponds to a classical model of adverse selection. We first present the standard model with two types of agent and then we generalize it, assuming that the type of agent belongs to a finite set of values. We provide a full characterization of the Principal’s optimization problem and we solve it using Kuhn-Tucker techniques. Focusing on the economic interpretation of the optimal solution, we also use a change of variables. The optimization problem is next expressed in terms of the new variables, the informational rents. In the last part of the paper we derive and summarize the characteristics of the optimal contracts in the situation of asymmetric information.

Keywords: Pareto efficiency; adverse selection model; optimal incentive contracts (search for similar items in EconPapers)
JEL-codes: C61 D82 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.ijept.org/index.php/ijept/article/view/ ... ormational_Rents/pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aes:ijeptp:v:2:y:2012:i:3:p:99-108

Access Statistics for this article

International Journal of Economic Practices and Theories is currently edited by Catalin Boja

More articles in International Journal of Economic Practices and Theories from Academy of Economic Studies - Bucharest, Romania Contact information at EDIRC.
Bibliographic data for series maintained by Catalin Boja ().