A Note on Uniqueness in Game-Theoretic Foundations of the Reactive Equilibrium
14 Pages Posted: 29 Oct 2014
Date Written: September 2014
Riley (1979)'s reactive equilibrium concept addresses problems of equilibrium existence in competitive markets with adverse selection. The game-theoretic interpretation of the reactive equilibrium concept in Engers and Fernandez (1987) yields the Rothschild-Stiglitz (1976)/Riley (1979) allocation as an equilibrium allocation, however multiplicity of equilibrium emerges. In this note we imbed the reactive equilibrium's logic in a dynamic market context with active consumers. We show that the Riley/Rothschild-Stiglitz contracts constitute the unique equilibrium allocation in any pure strategy subgame perfect Nash equilibrium.
Keywords: asymmetric information, competitive insurance market, contract addition, reactive equilibrium
JEL Classification: C72, D82, G22, L10
Suggested Citation: Suggested Citation