A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection

27 Pages Posted: 19 Apr 2011

See all articles by Wanda Mimra

Wanda Mimra

ESCP Business School

Achim Wambach

ZEW – Leibniz Centre for European Economic Research; University of Mannheim; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: April 13, 2011

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of Wilson (1977)’s ‘anticipatory equilibrium’ by introducing an additional stage in which initial contracts can be withdrawn after observation of competitors’ contract offers.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.

Keywords: asymmetric information, competitive insurance market, contract withdrawal

JEL Classification: C720, D820, G220, L100

Suggested Citation

Mimra, Wanda and Wambach, Achim, A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection (April 13, 2011). CESifo Working Paper Series No. 3412, Available at SSRN: https://ssrn.com/abstract=1808672 or http://dx.doi.org/10.2139/ssrn.1808672

Wanda Mimra

ESCP Business School ( email )

79 avenue de la République
Paris, 75011
France

Achim Wambach (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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