Adverse selection problems without the Spence-Mirrlees condition

Aloisio Araujo and Humberto Moreira ()

Journal of Economic Theory, 2010, vol. 145, issue 3, 1113-1141

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.

Keywords: Spence-Mirrlees; condition; Global; incentive; compatibility; U-shaped; condition; Discrete; pooling (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022-0531(10)00033-5
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Adverse selection problems without the spence-mirrlees condition (2001)
Working Paper: Adverse selection problems without the Spence-Mirrlees condition (2000)
Working Paper: Adverse selection problems without the Spence-Mirrlees condition (2000)
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:eee:jetheo:v:145:y:2010:i:3:p:1113-1141

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().