Equity and Adverse Selection |
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| Authors: | Ramarao Desiraju David E M Sappington |
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| Institution: | Department of Marketing College of Business Administration University of Central Florida Orlando, FL 32816; Department of Economics University of Florida PO Box 117140, Gainesville, FL 32611 |
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| Abstract: | We introduce concerns with inequity into the canonical adverse selection model. We find that aversion to ex post inequity is not constraining for the principal if the two agents are identical ex ante, but generally is constraining when the agents differ ex ante. Constraining equity concerns can lead to output levels that are either above or below standard levels, and can result in only one agent experiencing systematic inequity in equilibrium. |
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