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A general method of computing the cut-off point in adverse selection models

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  • R. Guo
  • P. Zhang

Abstract

Based on the model set-up in Laffont and Tirole (1986)'s seminal paper 'Using Cost Observation to Regulate Firms', we provide a general method of computing the cut-off point above which inefficient firms should be shut down under asymmetric information. With the help of the transversality conditions in optimal control, this method of computing the cut-off point is directly applicable to other adverse selection models under asymmetric information provided the optimization problem in these models could be written as an optimal control problem.

Suggested Citation

  • R. Guo & P. Zhang, 2014. "A general method of computing the cut-off point in adverse selection models," Applied Economics, Taylor & Francis Journals, vol. 46(33), pages 4116-4124, November.
    • Handle: RePEc:taf:applec:v:46:y:2014:i:33:p:4116-4124
    DOI: 10.1080/00036846.2014.952890
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    References listed on IDEAS

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    1. Bernard Salanié, 2005. "The Economics of Contracts: A Primer, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262195259, April.
    2. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, April.
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