On the Welfare Effects of Adverse Selection in Oligopolistic Markets

Abstract

We consider a principal-agent relationship with adverse selection. Principals pay informational rents due to asymmetric information and sell their output in a homogeneous Cournot-oligopoly. We find that asymmetric information may mitigate or more than compensate for the welfare reducing impact of market power. We further show that welfare in a setting with adverse selection may be higher than the maximized welfare level attainable in a world with perfect observability.