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Adverse selection under ignorance

Author

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  • Javier M. LÕpez-Cunat

    (Department of Fundamentos del AnÂlisis EconÕmico, Alicante University, 03071 Alicante, SPAIN)

Abstract

We examine an adverse selection relationship in which the principal may ignore the ex ante distribution of the agent's types. The principal's behavior is described by a disutility function that covers the standard minimax regret and minimax loss criteria. We show that the incentive compatible and individually rational mechanism, which minimizes the maximal (or the minimal) principal's disutility over a set of priors, requires the efficient agents to realize the corresponding first-best actions and may demand actions lower than the first-best ones from less efficient agents. We also analyze the qualitative differences between the case in which the principal considers regrets and the case in which he considers losses.

Suggested Citation

  • Javier M. LÕpez-Cunat, 2000. "Adverse selection under ignorance," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(2), pages 379-399.
    • Handle: RePEc:spr:joecth:v:16:y:2000:i:2:p:379-399
    Note: Received: 19 October 1998; revised version: 9 November 1999
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    Cited by:

    1. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona School of Economics.
    2. Carroll, Gabriel & Meng, Delong, 2016. "Robust contracting with additive noise," Journal of Economic Theory, Elsevier, vol. 166(C), pages 586-604.
    3. Garrett, Daniel F., 2014. "Robustness of simple menus of contracts in cost-based procurement," Games and Economic Behavior, Elsevier, vol. 87(C), pages 631-641.
    4. Brigitte Godbillon-Camus, 2003. "Subjective evaluation, ambiguity and relational contracts," Working Papers of LaRGE Research Center 2003-03, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

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