Competitive Insurance Markets Ii: The Structure of Equilibrium and Comparative Statics
34 Pages Posted: 22 May 2006
Date Written: May 2006
Abstract
Under the conditions conjectured by Rothschild and Stiglitz (1976) as leading to extreme market failure, we show the existence of a unique incentive-efficient equilibrium. In terms of its sensitivity to the structure of the buyer population, this equilibrium may be flexible or rigid. Closed-form illustrations of equilibria and the solution methodology, which is based on the characterization of Nash equilibrium in terms of selective efficiency (Faynzilberg, 2003), are also provided.
Keywords: adverse selection, efficiency, incomplete information, risk-sharing
JEL Classification: C72. C78, D41, D43, D45, D82, G22
Suggested Citation: Suggested Citation
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