Competitive Insurance Markets I: The Concept and Efficiency of Equilibrium

Abstract

Inter-firm rivalry and its impact on the stationarity of the economy are formalized in terms of selective efficiency that extends the Pareto and the Caldor-Hicks efficiency comparisons. Nash equilibrium of agents' decision-making is shown to be sufficient for an economy to be in equilibrium. Conversely, the extant practice of reliance on ad hoc "concepts of equilibrium" renders the resulting models overspecified. The ensuing loss of internal consistency explains the absence of a putative equilibrium in Rothschild and Stiglitz (1976), commonly interpreted as extreme market failure.

Keywords: Equilibrium, adverse selection, incomplete information, risk-sharing, efficiency

JEL Classification: C72, C78, D41, D43, D45, D82, G22