Akerlof Adverse Selection Model

Workers with types t ∈ [0,1] have outside option r(t). Equilibrium: w* = g(w*) = E[t | r(t) ≤ w*]. Both r(t) and g(w) plotted in the (t,w) plane — intersections with 45° line give efficient cutoff (◆) and CE wages (● stable, ○ unstable). Shaded regions show efficient employment set {t : t ≥ r(t)}.

45° line
r(t): solid  |  g(w): dashed  |  ● stable eq  |  ○ unstable eq  |  shading: efficient employment set
Equilibrium Summary
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