Summary
The paper analyzes an economy with two-sided adverse selection, focusing on equilibria that satisfy a refinement based on the notion of strategic stability. In the familiar case of one-sided adverse selection, agents reveal all of their private information as long as the contract space is rich enough. However, with twosided adverse selection, the sufficient conditions for separation are much stronger.
This paper is an outgrowth of work that has been presented at Carnegie Mellon University; the Studia della Economia/Workshop on Economic Theory, Venice, Italy; the Conference on Endogenous. Incompleteness at the Federal Reserve Bank of Minneapolis; SITE at Stanford University. I would like to thank the participants for their comments, NicholasYannelis and an anonymous referee for numerous helpful suggestions, and Piero Gottardi and Alberto Bisin for stimulating conversations over a number of years. The financial support of the National Science Foundation and the C.V. Starr Center for Applied Economics is gratefully acknowledged.
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Gale, D. (2005). Signaling in markets with two-sided adverse selection. In: Glycopantis, D., Yannelis, N.C. (eds) Differential Information Economies. Studies in Economic Theory, vol 19. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-26979-7_23
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DOI: https://doi.org/10.1007/3-540-26979-7_23
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