Adverse selection without single crossing

Screening models are used to analyze contracting in many subfields of economics like regulation, labor economics, monopoly pricing, taxation or finance. Most models assume single crossing. This simplifies the analysis as local incentive compatibility is in this case sufficient for global incentive compatibility. If single crossing is violated, global incentive compatibility constraints have to be taken into account. This paper studies monotone solutions in a model where single crossing is violated. It is shown that local and non-local incentive constraints distort the solution in opposite directions. Therefore, the optimal decision might involve distortions above as well as below the first best decision. Furthermore, the well known“no distortion at the top”property does not necessarily hold. Sufficient conditions for existence, monotonicity and continuity of the solution and an algorithm to obtain such a solution are derived. Some results can be readily applied. For example, overinsurance, i.e. insurance levels above first best as in “Cadillac” insurance plans, can be rationalized. In a non-linear pricing framework, the model also provides an explanation for marginal prices below marginal costs as observed in flat rate offers.