Participation constraints in adverse selection models
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A characterization is provided of the optimal contract offered by an uninformed principal to an informed agent when the latter's reservation utility depends on his type. The information rent is non-monotonic so that interior types may have a vanishing rent or be excluded from trade. Conditions are determined for the optimal contract to be separating, non-stochastic and to induce full participation. The results are applied to nonlinear pricing under price cap regulation and bypass competition.
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