Efficient Nash Equilibrium Under Adverse Selection

Abstract:     
This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz. We propose a simple extension of the game-theoretic structure in Hellwig under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson.

Number of Pages in PDF File: 65

Keywords: Insurance Market, Adverse Selection, Incentive E

JEL Classification: D86

working papers series