Ic l high types must prefer their bundle to the low

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Unformatted text preview: o bundle at all: θ u (q ) I t t θ u (q ) t. (IC-L) High types must prefer their bundle to the low types’bundle: θ u (q ) J. Lagerlöf (U of Copenhagen) t θu q Microeconomics (MikØk) 3: L2-II t. (IC-H) Spring ‘ 11 4 / 29 Fully Non-linear Tari¤: Graphical analysis (1/5) An allocation that does NOT solve the maximization problem What would be the ideal solution for the …rm? I That would be to let the two types consume their …rst-best levels q FB and q FB , and then choose some payments — call them t FB and t FB — such that neither type gets any rents (their IR constraints are binding). Is that allocation (and the associated pro…t level for the …rm) achievable? I I No, it would not be incentive compatible — it would violate the high type’ IC constraint. s See …gure [L2-II, …g. 1]! J. Lagerlöf (U of Copenhagen) Microeconomics (MikØk) 3: L2-II Spring ‘ 11 5 / 29 Fully Non-Linear Tari¤: Graphical analysis (2/5) Possible ways of making the allocation incentive compatible Adjusting the prices (see …gure [L2-II, …g. 2] on next slide) Make the low type’ bundle more expensive. [B FB ! B NEW ] s I But this would violate IR-L. Make the high type’ bundle less expensive. [AFB ! ANEW ] s I This is feasible. But is it the optimal way of …xing the problem? Adjusting the quantities/qualities (see …gure [L2-II, …g. 3]) Make the low type’ quantity/quality lower. [B FB ! B NEW ] s I But this would violate IR-L. Make the high type’ quantity/quality higher. [AFB ! ANEW ] s I This is feasible. But is it the optimal way of …xing the problem? J. Lagerlöf (U of Copenhagen) Microeconomics (MikØk) 3: L2-II Spring ‘ 11 6 / 29 Fully Non-Linear Tari¤: Graphical analysis (3/5) The rent-extraction/...
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This note was uploaded on 03/31/2013 for the course CENG 216 taught by Professor Klausschmidt during the Spring '11 term at Uni. Copenhagen.

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