ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School

Abstract: I construct an efficient mechanism for competitive markets with adverse selection. In the mechanism, each company offers two menus of contracts: a public menu and a private menu. The union of all the public menus needs to be offered by every active company in the market. On the contrary, a private menu concerns only the company that offers it. I show that this simple mechanism reduces the set of profitable deviations to the extent that a pure-strategy equilibrium exists in every market with adverse selection. Furthermore, I characterise general, well-studied environments in which the set of equilibrium allocations coincides with the set of efficient allocations.

Keywords: Efficiency; Adverse Selection; Competition Mechanism; Design; Existence

JEL-codes: D02; D82; D86

11 pages, February 22, 2016

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