We solve the principal-agent problem of a monopolist insurer selling to an agent whose riskiness (chance of a loss) is private information, a problem introduced in Stiglitz (1977)’s seminal paper. We prove several properties of optimal menus: the highest type gets full coverage (efficiency at the top), all other types are underinsured (downward distortions elsewhere), the contract is nonnegativ...

We study how present and future adverse selection costs affect the prices of assets that may be traded repeatedly. We find that adverse selection is not a trading cost on average, and therefore future trading “costs” have no direct impact on current prices. Adverse selection can lead to allocation inefficiencies, which influence prices. Specifically, prices are reduced by the present value of a...

Screening models are used to analyze contracting in many subfields of economics like regulation, labor economics, monopoly pricing, taxation or finance. Most models assume single crossing. This simplifies the analysis as local incentive compatibility is in this case sufficient for global incentive compatibility. If single crossing is violated, global incentive compatibility constraints have to ...

This paper reexamines the relationship between financial market imperfections and economic instability. I present a model in which financial accelerator effects come from adverse selection in credit markets. Unlike other models of the financial accelerator, the model I present has the potential to stabilize the economy rather than destabilize it. The stabilizing forces in the dynamic model are ...

Worker mobility is necessary for the efficient operation of the labor market, so that the best matches can be found between workers and employers. Employers have only limited information about the abilities of each prospective worker, however. When making hiring decisions, they take the chance of employing a worker who does not have the skills (and thus the productivity) that was originally exp...

This set of lecture notes covers a general model of adverse selection as well as a leading example— that of a price discriminating monopolist— due to Maskin and Riley (1984). At the end of this unit, students should understand the application of the revelation principal to this class of models, the general solution techniques, and the key economic trade-o¤— e¢ ciency versus information rent sav...

This paper considers a firm whose potential employees have private information on both their productivity and the extent of their fairness concerns. Fairness is modelled as inequity aversion, where fair-minded workers suffer if their colleagues get more income net of production costs. Screening workers with equal productivity but different fairness concerns is shown to be impossible if both typ...

In this paper, I study the nonparametric identification of a multidimensional adverse selection model. In particular, I consider the screening model of Rochet and Choné (1998), where products have multiple characteristics and consumers have private information about their multidimensional taste for these characteristics, and determine the data features and additional condition(s) that identify ...

In many long-term relationships, parties may be reluctant to reveal their private information in order to benefit from their informational advantage in the future. We point out that the strategic use of debt by an uninformed party induces another party to reveal private information. Our argument, which is consistent with casual observation, is based on the idea that (renegotiable) debt is a cre...