Efficient Nash Equilibrium Under Adverse Selection
Posted: 17 Oct 2011
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 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.
Keywords: Insurance Market, Adverse Selection, Incentive E
JEL Classification: D86
Suggested Citation: Suggested Citation
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