EFFICIENCY AND ADVERSE SELECTION

Ex-ante and interim constrained efficiency of market equilibria with adverse selection is studied. With a continuum of qualities, allocations which are attainable (i.e., feasible, incentive compatible, and individually rational) are convex combinations of one-step allocations (named for the fact that an agent's consumption is a single stepped function of quality). This makes possible a simple geometric treatment of efficiency. Competitive equilibrium is efficient if the distribution of quality is not too convex. Wilson's (Bell J. Econ. 11 (1980), 108-130) buyer's equilibrium is generically unique and efficient. An efficient Wilson's seller's equilibrium always exists. © 1990.