We showed above that in equilibrium low productivity entrepreneurs do not have the incentive to mimic the high productivity entrepreneur by self financing 𝛼∗α∗, i.e. at 𝛼∗α∗ the incentive compatibility constraint of the low productivity entrepreneurs holds.
- Is there another incentive compatibility constraint which needs to hold for the signalling equilibrium derived above?
- If so, write it out.
- Does this incentive compatibility constraint actually hold in equilibrium?
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