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A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse SelectionWanda MimraETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich Achim WambachUniversity of Cologne; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) April 13, 2011 CESifo Working Paper Series No. 3412 Abstract: We extend the seminal Rothschild and Stiglitz (1976) model on competitive insurance markets with asymmetric information in the spirit of Wilson (1977)’s ‘anticipatory equilibrium’ by introducing an additional stage in which initial contracts can be withdrawn after observation of competitors’ contract offers. We show that an equilibrium always exists where consumers obtain their respective Wilson-Miyazaki-Spence (WMS) contract. Jointly profit-making contracts can also be sustained as equilibrium contracts. However, the second-best efficient WMS allocation is the unique equilibrium allocation under entry.
Number of Pages in PDF File: 27 Keywords: asymmetric information, competitive insurance market, contract withdrawal JEL Classification: C720, D820, G220, L100 working papers seriesDate posted: April 19, 2011Suggested CitationContact Information
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