IDEAS home Printed from https://ideas.repec.org/a/aes/ijeptp/v2y2012i3p99-108.html
   My bibliography  Save this article

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

Author

Listed:
  • Daniela Elena Marinescu

    (Bucharest Academy of Economic Studies)

  • Ioana Manafi

    (Bucharest Academy of Economic Studies)

  • Dumitru Marin

    (Bucharest Academy of Economic Studies)

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.

Suggested Citation

  • Daniela Elena Marinescu & Ioana Manafi & Dumitru Marin, 2012. "An Adverse Selection Model with Finite Number of Types and Informational Rents," International Journal of Economic Practices and Theories, Academy of Economic Studies - Bucharest, Romania, vol. 2(3), pages 99-108, July.
    • Handle: RePEc:aes:ijeptp:v:2:y:2012:i:3:p:99-108
    as

    Download full text from publisher

    File URL: http://www.ijept.org/index.php/ijept/article/view/An_Adverse_Selection_Model_with_Finite_Number_of_Types_and_Informational_Rents/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-930, July.
    2. Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
    3. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
    4. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
    5. Claude Fluet & François Pannequin, 1997. "Complete Versus Incomplete Insurance Contracts under Adverse Selection with Multiple Risks," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 22(2), pages 81-101, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Laura CONSTANTIN & Ștefan Virgil IACOB & Dana Luiza GRIGORESCU, 2021. "Financial contracts with several types of agents," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(628), A), pages 45-56, Autumn.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dionne, Georges & Fombaron, Nathalie & Doherty, Neil, 2012. "Adverse selection in insurance contracting," Working Papers 12-8, HEC Montreal, Canada Research Chair in Risk Management.
    2. Chen, Yong & Mak, Barry & Li, Zhou, 2013. "Quality deterioration in package tours: The interplay of asymmetric information and reputation," Tourism Management, Elsevier, vol. 38(C), pages 43-54.
    3. Andrea Attar & Thomas Mariotti & François Salanié, 2021. "Entry-Proofness and Discriminatory Pricing under Adverse Selection," American Economic Review, American Economic Association, vol. 111(8), pages 2623-2659, August.
    4. Gan, Li & Huang, Feng & Mayer, Adalbert, 2015. "A simple test for private information in insurance markets with heterogeneous insurance demand," Economics Letters, Elsevier, vol. 136(C), pages 197-200.
    5. Sebastian Panthöfer, 2016. "Risk Selection under Public Health Insurance with Opt‐Out," Health Economics, John Wiley & Sons, Ltd., vol. 25(9), pages 1163-1181, September.
    6. Azevedo, Eduardo M. & Gottlieb, Daniel, 2019. "An example of non-existence of Riley equilibrium in markets with adverse selection," Games and Economic Behavior, Elsevier, vol. 116(C), pages 152-157.
    7. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona School of Economics.
    8. Jean Pinquet & Georges Dionne & Charles Vanasse & Mathieu Maurice, 2007. "Point-record incentives, asymmetric information and dynamic data," Working Papers hal-00243056, HAL.
    9. Nathaniel Hendren & Camille Landais & Johannes Spinnewijn, 2021. "Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 457-486, August.
    10. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
    11. Stéphane Gauthier & Fanny Henriet, 2016. "Consumption taxes and taste heterogeneity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01252563, HAL.
    12. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(3), pages 877-921.
    13. Peter Arcidiacono & Esteban M. Aucejo & Hanming Fang & Kenneth I. Spenner, 2011. "Does affirmative action lead to mismatch? A new test and evidence," Quantitative Economics, Econometric Society, vol. 2(3), pages 303-333, November.
    14. Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, April.
    15. Gaurab Aryal & Isabelle Perrigne & Quang Vuong, 2011. "Identification of Insurance Models with Multidimensional Screening," ANU Working Papers in Economics and Econometrics 2011-538, Australian National University, College of Business and Economics, School of Economics.
    16. Makris, Miltiadis, 2009. "Incentives for motivated agents under an administrative constraint," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 428-440, August.
    17. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    18. Keane, Michael & Stavrunova, Olena, 2016. "Adverse selection, moral hazard and the demand for Medigap insurance," Journal of Econometrics, Elsevier, vol. 190(1), pages 62-78.
    19. Javier A. Birchenall & Thomas G. Koch, 2015. ""Gallantry in Action": Evidence of Advantageous Selection in a Voluntary Army," Journal of Law and Economics, University of Chicago Press, vol. 58(1), pages 111-138.
    20. Xi Wu & Li Gan, 2023. "Multiple dimensions of private information in life insurance markets," Empirical Economics, Springer, vol. 65(5), pages 2145-2180, November.

    More about this item

    Keywords

    Pareto efficiency; adverse selection model; optimal incentive contracts;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aes:ijeptp:v:2:y:2012:i:3:p:99-108. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catalin Boja (email available below). General contact details of provider: https://edirc.repec.org/data/aseeero.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.