A general method of computing the cut-off point in adverse selection models

Based on the model set-up in Laffont and Tirole (1986)'s seminal paper 'Using Cost Observation to Regulate Firms', we provide a general method of computing the cut-off point above which inefficient firms should be shut down under asymmetric information. With the help of the transversality conditions in optimal control, this method of computing the cut-off point is directly applicable to other adverse selection models under asymmetric information provided the optimization problem in these models could be written as an optimal control problem.