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“treacherous,” in so far as it may suggest conclusions that seem general, but
that are not. For example, the conclusion that we will shortly reach with this
model that the optimal contract implies distinct outcomes for distinct states
of nature—a result called separation —is not as general as it may seem.
Moreover, the assumption of two separation types conceals, in essence, a
variety of assumptions that must be made clear. It similarly conceals the
richness of the screening problem in complex, more realistic, relationships.
Our view is that few economic prescriptions and predictions should be
reached from considering just the two-type model. Keeping this admonition
in mind, we now turn to a simple analysis of private procurement in a two-
type model.
ASSIGNMENTS
1. What does the term ‘hidden information’ mean?
2. Give some examples of hidden information.
3. What does the term ‘model’ mean? Find the paragraph where this term
is used and translate it.
4. Explain the model shown below.
Model 1.1 Information Communities Model
