Competitive Equilibrium with Type Convergence in an Asymmetrically Informed Market

Abstract

This article studies an asymmetric information game with “type convergence”, in which, under some realizations of a common uncertainty, inducing informed agents to reveal their types through self-selection by contract choice is either costly or impossible. Under other realizations, self-selection permits costless distinctions between informed agents. I obtain sufficient conditions under which contracting with options prior to the realization of the common uncertainty leads to the existence of a perfectly separating, costless Nash equilibrium. Applications to variable rate loan commitments and life insurance contracting are discussed.