A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection
27 Pages Posted: 19 Apr 2011
Date Written: April 13, 2011
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of Wilson (1977)’s ‘anticipatory equilibrium’ by introducing an additional stage in which initial contracts can be withdrawn after observation of competitors’ contract offers.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
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