Type e^ would like to pretend to be of type G^, if he is offered
(t*, ©L + and (tH*' eH + 8HlH*^ Thus» the incentive constraint for the low productivity type is not satisfied.
By a similar argument as in the tex+ we ran show:
Claim 2: The separating equilibrium of this model exists and is as follows:
- the indifference curve of the high productivity type is above the pooling break-even line.
- no cross-subsidizing contract, that will be accepted by both types, exists that gives a firm a positive profit
This equilibrium is shown in Figure 13.D. 1(c)
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