Participation Constraints in Adverse Selection Models.

This paper studies the optimal contract offered by an uninformed principal to an informed agent when standard assumptions on the shape of the reservation utility profile don't hold. I first exhibit conditions for the continuity and the uniqueness of the solution. I then characterize the solution and identify conditions for the optimal contract to be separating. I provide the closed form solution for a class of regular problems and discuss some applications to nonlinear pricing under price cap regulation, and under bypass competition. Finally I use the analysis to characterize the set of renegociation- proof contracts, with an application to quality signaling.