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

42 Pages Posted: 18 Sep 2019

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

Department of Economics, Accounting, and Finance, School of Management, Marist College; Columbia University, Graduate School of Arts and Sciences, Department of Economics; Department of Economics, University of Pittsburgh

Date Written: September 2019

Abstract

We study the Rothschild-Stiglitz model of insurance markets, introducing endogenous information disclosure about insurance sales and purchases by firms and consumers. We show that a competitive equilibrium exists under unusually mild conditions, and characterize the unique equilibrium outcome. With two types of consumers the outcome is particularly simple, consisting of a pooling contract 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 constrained Pareto efficient. Asymmetric equilibrium information flows with endogenous consumer disclosure are critical in supporting the equilibrium.

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Suggested Citation

Stiglitz, Joseph E. and Yun, Jungyoll and Kosenko, Andrew, Characterization, Existence, and Pareto Optimality in Markets with Asymmetric Information and Endogenous and Asymmetric Disclosures: Basic Analytics of Revisiting Rothschild-Stiglitz (September 2019). NBER Working Paper No. w26251. Available at SSRN: https://ssrn.com/abstract=3454352

Joseph E. Stiglitz (Contact Author)

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Jungyoll Yun

Ewha Womans University ( email )

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Andrew Kosenko

Department of Economics, Accounting, and Finance, School of Management, Marist College ( email )

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

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Department of Economics, University of Pittsburgh ( email )

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