
Uncertainty and Imperfect Information in Markets
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But by doing this, the seller could offer the high-risk type a full-insurance contract that
gave him a smaller information rent (e.g., contract
). Reducing the information rent
represents a first-order gain for the seller. Because the efficiency loss is second order,
while the rent-reduction benefit is first order, moving away from offering just
is in
the seller’s interest. The expected profit-maximizing choices of
and
E
depend on
the relative proportions of high and low-risk types in the population. The greater the
proportion of high-risk types, the closer
will be to the no-insurance ...