Adverse selection without single crossing

Résumé

Adverse selection models are used to analyze contracting in many subfields of economics like regulation, labor economics, monopoly pricing, taxation or finance. Most authors assume single crossing. This simplifies the analysis as local incentive compatibility is in this case sufficient for global incentive compatibility. Araujo and Moreira (2010) characterize U-shaped solutions in a model without single crossing. This paper complements their work by studying monotone solutions. It is shown that local and non-local incentive constraints distort the solution in opposite directions. Therefore, the optimal decision might involve distortions above as well as below first best. Furthermore, the well known "no distortion at the top" property does not necessarily hold.