ECN611 Handout8

ECN611 Handout8 - Eco no m ic s 6 1 1 H a nd o ut # 8 T HE...

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611.08- 1 Economics 611 Handout #8 THE ECONOMICS OF ASYMMETRIC INFORMATION Screening (action taken by the less-informed agent) LH Types: 0 < è < è Costs: To workers - not firms! - via task level, t. tt t c(t, è ) c(0, è ) = 0 Partials: c (t, è ) > 0, c (t, è ) > 0 è t è c (t, è ) < 0, c (t, è ) < 0 r( è ) = r( è ) = 0 ; u(w, t | è ) = w – c(t, è ) Game: Stage 0. Nature selects worker type, H (prob = ë ) or L. Stage 1. Each of two firms simultaneously offer finitely many (w, t) contracts; if a firm offers none, their profit is 0. Stage 2. Workers decide whether or not to accept any contract - and if accept, which one. Tie breaks: 1. lower t; 2. accept; 3. coin toss between firms Case A. Types are observable Then at equilibrium, ii i type i accepts (w *, t *) = ( è , 0) and each firm earns zero
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ECN611 Handout8 - Eco no m ic s 6 1 1 H a nd o ut # 8 T HE...

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