Endogenous Insolvency in the Rothschild–Stiglitz Model

17 Pages Posted: 12 Feb 2019

See all articles by Wanda Mimra

Wanda Mimra

Catholic University of Lille - IESEG School of Management

Achim Wambach

ZEW – Leibniz Centre for European Economic Research

Date Written: March 2019

Abstract

Even 30 years after Rothschild and Stiglitz's ([Rothschild, M., 1976]) seminal work on competitive insurance markets with adverse selection, existence and characterization of the equilibrium outcome are still an open issue. We model a basic extension to the Rothschild and Stiglitz ([Rothschild, M., 1976]) model: we endogenize up‐front capital of insurers. Under limited liability, low up‐front capital gives rise to an aggregate endogenous insolvency risk, which introduces an externality among customers of an insurer (Faynzilberg, 2006). It is shown that an equilibrium with the second‐best efficient Miyazaki–Wilson–Spence allocation always exists.

Suggested Citation

Mimra, Wanda and Wambach, Achim, Endogenous Insolvency in the Rothschild–Stiglitz Model (March 2019). Journal of Risk and Insurance, Vol. 86, Issue 1, pp. 165-181, 2019, Available at SSRN: https://ssrn.com/abstract=3332583 or http://dx.doi.org/10.1111/jori.12206

Wanda Mimra (Contact Author)

Catholic University of Lille - IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

Achim Wambach

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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