We decentralize incentive efficient allocations in large adverse selection economies by introducing a competitive market for mechanisms, that is, for menus of contracts. Facing a budget constraint, informed individuals purchase (lottery) tickets to enter mechanisms, whereas firms sell tickets and supply slots at mechanisms at given prices. Beyond optimization, market clearing, and rational expectations, an equilibrium requires that firms cannot favorably change, or cut, prices. An equilibrium exists and is incentive efficient. An equilibrium can be computed as the solution to a programming problem that selects the incentive efficient outcome preferred by the highest type within an appropriately defined set. For two-types economies, this is the only equilibrium outcome.
ASJC Scopus subject areas
- Economics and Econometrics