Characterization, Existence, and Pareto Optimality in Insurance Markets with Asymmetric Information with Endogenous and Asymmetric Disclosures: Revisiting Rothschild-Stiglitz

40 Pages Posted: 18 Jun 2018

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Jungyoll Yun

Ewha Womans University

Andrew Kosenko

Columbia University, Graduate School of Arts and Sciences, Department of Economics; Department of Economics, University of Pittsburgh

Date Written: June 2018

Abstract

We study the Rothschild-Stiglitz model of competitive insurance markets with endogenous information disclosure by both firms and consumers. We show that an equilibrium always exists, (even without the single crossing property), and characterize the unique equilibrium allocation. With two types of consumers the outcome is particularly simple, consisting of a pooling allocation which maximizes the well-being of the low risk individual (along the zero profit pooling line) plus a supplemental (undisclosed and nonexclusive) contract that brings the high risk individual to full insurance (at his own odds). We show that this outcome is extremely robust and Pareto efficient.

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Suggested Citation

Stiglitz, Joseph E. and Yun, Jungyoll and Kosenko, Andrew, Characterization, Existence, and Pareto Optimality in Insurance Markets with Asymmetric Information with Endogenous and Asymmetric Disclosures: Revisiting Rothschild-Stiglitz (June 2018). NBER Working Paper No. w24711. Available at SSRN: https://ssrn.com/abstract=3198013

Joseph E. Stiglitz (Contact Author)

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Jungyoll Yun

Ewha Womans University ( email )

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Seodaemun-gu
Seoul 120-750, Seoul 120

Andrew Kosenko

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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New York, NY 10027
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Department of Economics, University of Pittsburgh ( email )

4901 Wesley Posvar Hall
230 South Bouquet Street
Pittsburgh, PA 15260
United States

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