Efficient Nash Equilibrium Under Adverse Selection
Collegio Carlo Alberto
University of Warwick - Finance Group
September 1, 2011
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 firms 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: D86working papers series
Date posted: October 17, 2011
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