Efficient Nash Equilibrium Under Adverse Selection

Posted: 17 Oct 2011

See all articles by Theodoros Diasakos

Theodoros Diasakos

University of Stirling - Department of Economics

Kostas Koufopoulos

University of Warwick - Finance Group

Date Written: September 1, 2011

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.

Keywords: Insurance Market, Adverse Selection, Incentive E

JEL Classification: D86

Suggested Citation

Diasakos, Theodoros and Koufopoulos, Kostas, Efficient Nash Equilibrium Under Adverse Selection (September 1, 2011). Available at SSRN: https://ssrn.com/abstract=1944825 or http://dx.doi.org/10.2139/ssrn.1944825

Theodoros Diasakos

University of Stirling - Department of Economics ( email )

Stirling, FK9 4LA
United Kingdom

Kostas Koufopoulos (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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