Overall Inefficiency and Cycles in Non-ordered Screening under Capacity Constraints and Standardization

We study discrete-type screening without Spence-Mirrlees condition. Under non-separable and non-concave cost, all packages can be distorted in equilibrium, even when only the participation constraints are active. This and other paradoxical effects, shown by examples, are caused by some kind of envy-cycles among agents. Theorem 1 proves that such effects are precluded under separable or concave cost, thus justifying the applicability of the standard screening model, which appears doubtful under more general costs.