Participation constraints in adverse selection models

This paper characterizes the optimal contract offered by an uninformed prin cipal to an informed agent when the latter's reservation utility depends on his type. The informational rent is nonmonotonic so that interior types ma y have a vanishing rent or be excluded fron trade. The paper identifies con ditions for the optimal contract to be seperating, to be nonstochastic, and to induce full participation. it also discusses the nature of the solution when bunching occurs. The results are applied to nonlinear pricing. Journa l of Economic Literature Classification Numbers: D82, D42, D23, D78, L51, L 15. (C) 2000 Academic Press.