Adverse selection under complete ignorance

Abstract

We examine an adverse selection relationship in which the principal is unaware of the ex ante distribution of the agent's types. We show that the minimax regret mechanism, which is an incentive compatible and individually rational mechanism that minimizes the maximal principal's regret, requires the efficient agent to realize the corresponding first-best action and demands an action lower than the first-best one from the inefficient type. We prove also that the value of the minimal informational rent affects both, the optimal regrets and the distortion induced by the minimax regret mechanism.Principal-agent problem, adverse selection, minimax Regret Criterion