Adverse selection without single crossing: Monotone solutions
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Adverse selection without single crossing : Monotone solutions. / Schottmüller, Christoph.
In: Journal of Economic Theory, Vol. 158, 2015, p. 127-164.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - Adverse selection without single crossing
T2 - Monotone solutions
AU - Schottmüller, Christoph
N1 - JEL classification: C61; D82; D86
PY - 2015
Y1 - 2015
N2 - The single-crossing assumption simplifies the analysis of screening models as local incentive compatibility becomes sufficient for global incentive compatibility. If single crossing is violated, global incentive compatibility constraints have to be taken into account. This paper studies monotone solutions in a screening model that allows a one-time violation of single crossing.The results show that local and non-local incentive constraints distort the solution in opposite directions. Therefore, the optimal decision might involve distortions above as well as below the first-best decision. Furthermore, the well-known “no distortion at the top” property does not necessarily hold. The results show that the decision can even be distorted above first best for all types. Sufficient conditions for existence, (strict) monotonicity and continuity of the solution are presented. A new necessary condition satisfied by such solutions is found. An algorithm based on this condition can calculate continuous and strictly monotone solutions.
AB - The single-crossing assumption simplifies the analysis of screening models as local incentive compatibility becomes sufficient for global incentive compatibility. If single crossing is violated, global incentive compatibility constraints have to be taken into account. This paper studies monotone solutions in a screening model that allows a one-time violation of single crossing.The results show that local and non-local incentive constraints distort the solution in opposite directions. Therefore, the optimal decision might involve distortions above as well as below the first-best decision. Furthermore, the well-known “no distortion at the top” property does not necessarily hold. The results show that the decision can even be distorted above first best for all types. Sufficient conditions for existence, (strict) monotonicity and continuity of the solution are presented. A new necessary condition satisfied by such solutions is found. An algorithm based on this condition can calculate continuous and strictly monotone solutions.
KW - Faculty of Social Sciences
KW - Global incentive compatibility
KW - screening
KW - Spence-Mirrlees condition
U2 - 10.1016/j.jet.2015.04.002
DO - 10.1016/j.jet.2015.04.002
M3 - Journal article
VL - 158
SP - 127
EP - 164
JO - Journal of Economic Theory
JF - Journal of Economic Theory
SN - 0022-0531
ER -
ID: 135371013