THE ECONOMICS OF IMPERFECT INFORMATION 645
X = Wo - ya - a2pL/(l - pL),
Y= Wo-pHd + a,
and
Z = Wo - d - ya + a2.
The solution to this problem can be analyzed by standard Kuhn- Tucker techniques. If the constraint a > 0 is binding at the optimum, then the solution involves no subsidy to the high-risk persons; (aH*, aL*) is the separating equilibrium. It is straightforward but tedious to show that a sufficient condition for this is that (