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A Walrasian Theory of Markets with Adverse Selection

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Author Info
Gale, Douglas

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Abstract

This paper describes a Walrasian theory of markets with adverse selection and shows how refinements of equilibrium can be used to characterize uniquely the equilibrium outcome. Equilibrium exists under standard conditions. It is shown that, under certain conditions, a stable set exists and is contained in a connected set of equilibria. For generic models, all the equilibria in the stable set have the same outcome. These ideas are applied to markets with one-sided and two-sided uncertainty. Under standard monotonicity conditions, it is shown that the stable outcome is separating and implies a particular pattern of matches of buyers and sellers. Copyright 1992 by The Review of Economic Studies Limited.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 59 (1992)
Issue (Month): 2 (April)
Pages: 229-55
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Handle: RePEc:bla:restud:v:59:y:1992:i:2:p:229-55

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  1. George J. Mailath & Georg Noldeke, 2007. "Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection?," PIER Working Paper Archive 07-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  2. Michael Peters, 1998. "Limits of Exact Equilibria for Capacity Constrained Sellers with costlySearch," Working Papers peters-98-01, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  3. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers 1304, Cowles Foundation, Yale University. [Downloadable!]
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  4. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  5. George J. Mailath & Georg Noldeke, 2006. "Extreme Adverse Selection, Competitive Pricing, and Market Breakdown," Cowles Foundation Discussion Papers 1573, Cowles Foundation, Yale University. [Downloadable!]
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  6. Alberto Bisin & Piero Gottardi, 2000. "Decentralizing Incentive Efficient Allocations of Economies with Adverse Selection," Econometric Society World Congress 2000 Contributed Papers 0855, Econometric Society. [Downloadable!]
  7. Michael Sattinger, . "Price Dynamics and the Market for Access to Trading Partners," Discussion Papers 03-10, State University of New York at Albany, Department of Economics. [Downloadable!]
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  8. Alberto Bisin & Piero Gottardi & Danilo Guaitoli, 1998. "A Note on the Convergence to Competitive Equilibria in Economies with Moral Hazard," Economics Working Papers 381, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  9. Alberto Martin, 2003. "On Rothschild-Stiglitz as Competitive Pooling," Economics Working Papers 917, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2006. [Downloadable!]
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  10. Michael Peters, 1995. "On the Equivalence of Walrasian and Non-Walrasian Equilibria in Contract Markets: The case of Complete Contracts," GE, Growth, Math methods 9507001, EconWPA. [Downloadable!]
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  11. Georg Noldeke & Larry Samuelson, 1994. "Learning to Signal in Markets," Game Theory and Information 9410001, EconWPA, revised 21 Oct 1994. [Downloadable!]
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  12. Michael Peters, 1997. "Surplus Extraction and Competition," Working Papers peters-97-02, University of Toronto, Department of Economics. [Downloadable!]
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  13. Andrei Gomberg, 2003. "How many sorting equilibria are there (generically)?," Working Papers 0303, Centro de Investigacion Economica, ITAM. [Downloadable!]
  14. Alberto Martin, 2008. "Adverse Selection, Credit, and Efficiency: the Case of the Missing Market," Economics Working Papers 1085, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  15. Max Blouin, 2000. "Quality Undersupply and Oversupply," Cahiers de recherche CREFE / CREFE Working Papers 113, CREFE, Université du Québec à Montréal. [Downloadable!]
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