(solution) For the two type case in the Laffont and Tirole (1986) model of regulation with adverse selection

(solution) For the two type case in the Laffont and Tirole (1986) model of regulation with adverse selection

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.