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Competitive Markets for Non-Exclusive Contracts with Adverse Selection: the Role of Entry Fees

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  • Alberto Bisin

    (New York University)

  • Piero Gottardi

    (University of Venezia)

Abstract

This paper studies competitive equilibria in economies characterized by the presence of asymmetric information, where non-exclusive contracts are traded on competitive markets and agents may be privately informed over their payoff. For such economies competitive equilibria may not exist when contracts trade at linear prices. We show that (non-trivial) competitive equlibria exist, under general conditions, with a minimal requirement on the observability of agents' trades: two-part tariffs suffice, where the cost of trading each contract consists of an entry fee and a linear component in the quantity traded. The entry fee is determined at equilibrium and represents a measure of adverse selection in the economy. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 2 (April)
Pages: 313-338

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Handle: RePEc:red:issued:v:6:y:2003:i:2:p:313-338

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Keywords: general equilibrium; asymmetric information; two-part tariffs.;

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References

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  1. Kehoe, Timothy J. & Levine, David K. & Prescott, Edward C., 2002. "Lotteries, Sunspots, and Incentive Constraints," Journal of Economic Theory, Elsevier, Elsevier, vol. 107(1), pages 39-69, November.
  2. Kahn, C.M. & Mookherjee, D., 1996. "Competition and Incentives with Non-Exclusive Contracts," Papers, Boston University - Industry Studies Programme 75, Boston University - Industry Studies Programme.
  3. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 879R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1989.
  4. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 655-78, May.
  5. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series 1504, CESifo Group Munich.
  6. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 52(1), pages 21-45, January.
  7. Al-Najjar, Nabil Ibraheem, 1995. "Decomposition and Characterization of Risk with a Continuum of Random Variables," Econometrica, Econometric Society, Econometric Society, vol. 63(5), pages 1195-1224, September.
  8. Sun, Yeneng, 1998. "A theory of hyperfinite processes: the complete removal of individual uncertainty via exact LLN1," Journal of Mathematical Economics, Elsevier, vol. 29(4), pages 419-503, May.
  9. Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, David K. Levine.
  10. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 36(1), pages 110-119, June.
  11. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
  12. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, Elsevier, vol. 10(1), pages 8-23, February.
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Cited by:
  1. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2009. "Non-Exclusive Competition in the Market for Lemons," TSE Working Papers, Toulouse School of Economics (TSE) 09-055, Toulouse School of Economics (TSE).

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