For the two type case in the Laffont and Tirole (1986) model of regulation with adverse selection and moral hazard, use the incentive compatibility constraint for the low-cost firm and the individual rationality constraint for the high-cost firm to show that the profits (information rents) of the low-cost firm equal π 2 = ψ( e 1 ) − ψ( e 1 − γθ) where γθ = θ 1 − θ 2 and ψ( e ) is the cost of effort.
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