Screening

Question 1

what happens in a screening model (basic)

Answer 1

in a screening model, it is the uninformed individual who moves first, by posting (offering) contracts to the other side of the market

Question 2

which model is it where the worker moves first and which model is it where the firm moves first

Answer 2

signalling is where the worker moves first,

screening is where the firm moves first

Question 3

under full information what is the optimal insurance for all customers (screening)

Answer 3

all customers will be fully insured (money they get from insurance is their entire wealth)

Question 4

what is the first equilibrium in the insurance games

Answer 4

full insurance,

when the firm makes zero profit then see what the values are

Question 5

who values wealth in the no theft state more *

Answer 5

the safe types

Question 6

who has a steeper indifference curve *

Answer 6

the safe type has a steeper indifference curve since they prefer wealth in the no theft state more because the state is more likely for s rather than r

Question 7

is there a pooling equilibrium in the insurance screening game *

Answer 7

no, firm can post a contract between the two indifference curves such that only the safe type will take it, since we can do this for any pooling contract, there is no pooling equilibrium (page 7back of notes)

Question 8

how does the firm stop risky types masquerading as safe types

Answer 8

firm offers to safe types a contract (Ks,Ls) that gives risky types an expected utility not greater that the one they get from their own contract

Question 9

can there be a separating equilibrium in insurance game screening *

Answer 9

if proportion of safe types low enough the pooling zero-profit line will be less steep, if the s indifference curve going through the s contract does not cross the pooling zero-profit line then this pair of contracts is a separating equilibrium (25/27 screening topic 3)

Question 10

what is it called when the constraint holds with equality at the optimum, g(x,y) = 0 *

Answer 10

the constraint is binding

Question 11

what is it called when the constraint holds with strict inequality, g(x,y) > 0 *

Answer 11

the constraint is not binding or slack

Question 12

what does it mean when the constraint is binding

Answer 12

what is it called when the constraint holds with equality at the optimum, g(x,y) = 0

Question 13

what does it mean when the constraint is not binding or slack

Answer 13

what is it called when the constraint holds with strict inequality, g(x,y) > 0

Question 14

what does ∂L/∂λ=0 imply (inequality constraints)

Answer 14

the constraint is binding and holds with equality at the optimum g(x,y)=c

Question 15

what are the kuhn-tucker conditions

Answer 15

∂L/∂x=0, ∂L/∂y=0, λ>_0 and λ x ∂L/∂λ =0

Question 16

is there a separating or pooling equilibrium if the proportion of s types is larger

Answer 16

if proportion larger, the pooling zero-profit line is steeper so the s indifference curve going through the s contract might cross the zero-profit line,
a new contract will then attract all customers and will yield positive profit (as below zero-profit line), this is a profitable deviation from the separating contract, but there cannot be a pooling equilibrium so there is no equilibrium
25/27