On signalling and screening in markets with asymmetric information

Abstract

The two games that are typically used to model markets with asymmetric information are the signalling game and the screening game. In the signalling game, an equilibrium may not be efficient because of the arbitrariness of off-the-equilibriumpath beliefs. In the screening game, a pure-strategy Nash equilibrium may fail to exist because of "cream-skimming" deviations. Perhaps surprisingly, I show how equilibrium generically exists and is efficient in a game that combines signalling and screening. The signalling part assures the existence of equilibrium, whereas the screening part prevents non-efficient allocations from being supported as equilibrium allocations.

On the existence of positive equilibrium profits in competitive screening markets

“…A pure-strategies Nash equilibria often does not exist in screening markets (see Farinha Luz (2017) for a discussion of mixed strategies by firms). Several alternative equilibrium concepts have been explored in the literature (Wilson (1977), Riley (1979), Mimra and Wambach (2018), Dosis (2018), Azevedo and Gottlieb (2017)). A generalization of the analysis in this article to these other equilibrium concepts is outside the scope of the present article and left for future research.…”