Economies with Asymmetric Information and Individual Risk ∗

In economies with asymmetric information agents have private information on economically relevant variables: on individual states (economies with private information), on the action taken (moral hazard), on their type (adverse selection). We analyze competitive equilibria of these economies in the tradition of Prescott and Townsend ([9]). It is known that economies with adverse selection behave differently from the others: we clarify how and why. Equilibria typically fail to exist for adverse selection, while they always exist for the other classes, even when there are aggregate states affecting all types. The reason of this difference is in the structure of the incentive compatible trades. To see it, we first provide a unified treatment of the different types of economies. Once this is done, it becomes clear that all these economies share the property that efficient outcome require personalized (type dependent) prices, since they are all economies with individual risk (as in Malinvaud). Type dependent prices are not problematic in economies where types are known, since agents may be restricted to trade in the market corresponding to their type. In Adverse Selection Economies, this requirement becomes an additional constraint: agents of one type must not find convenient to trade in any other market. This requirement cannot be typically satisfied in economies where equilibria are efficient.