文档介绍：Chapter 7
Markets with Adverse Selection
A market model
These notes introduce some ideas for modeling markets with adverse selec-
cannot be easily modated by the standard signaling game ., be-
cause there is two-sided adverse selection. For present purposes, however, it
is enough to deal with the simplest case in which there is adverse selection
on one side of the market only.
The use of petitive paradigm to analyze markets with adverse
selection goes back to Spence (1973). The ideas presented here were devel-
oped in a series of papers Gale (1991, 1992, 1996). There are two mutually
exclusive classes of individuals (agents). We can think of them as buyers and
sellers, but nothing depends on this interpretation. The agents on one side
of the market have private information, so we call them the informed agents.
The agents on the other side of the market are the ’s
private information is represented by his type. There is a finite set of types
T . Each type consists of a (non-atomic) continuum of identical agents and
the measure of agents of type t is denoted by N(t) > >0
uninformed agents.
There is a finite set of contracts Θ. (Later the theory is extended to an
infinite set). Each contract involves one agent from each side of the market.
If an uninformed agent exchanges a θ contract with an informed agent of type
t, the uninformed agent’s payoff is u(θ, t) and the informed agent’s payoff is
v(θ, t). Each agent has a reservation utility, the utility he gets if a contract is
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2 CHAPTER 7. MARKETS WITH ADVERSE SELECTION
not exchanged and he has to take his next best option. With an appropriate
normalization of the payoff functions, the reservation utility is 0 for every
type.
The equilibrium choices made by the agents are described by an alloca-
tion, that describes the number of agents of each type that chooses a given
contract. An allocation