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Adverse Selection, Dissembling, and Competitive Equilibrium

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  • Herschel I. Grossman

Abstract

Rothschild and Stiglitz have shown than insurance markets and other markets in which an adverse-selection problem exists cannot have Nash-type pooling or subsidized separating equilibria and are unlikely to have Nash-type unsubsidized separating equilibria. Wilson, Miyazaki, and Riley have analyzed anticipatory pooling and subsidized-separating equilibria and reactive unsubsidized separating equilibria. Each of these alternatives to Nash-type equilibria requires strategic behavior on the part of insurance sellers for support. The present paper analyzes as another alternative pooling equilibria that require dissembling behavior on the part of insurance buyers for support. This dissembling model has the attractive feature that it takes explicit account of the convention of requiring insurance buyers to submit applications, a practice that the analysis interprets to be a natural response to the adverse-selection problem.

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 10 (1979)
Issue (Month): 1 (Spring)
Pages: 336-343

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Handle: RePEc:rje:bellje:v:10:y:1979:i:spring:p:336-343

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Cited by:
  1. John G. Riley, 1978. "Alternative Signalling Equilibrium Concepts," UCLA Economics Working Papers 120, UCLA Department of Economics.
  2. Dionne, Georges, 1981. "Le risque moral et la sélection adverse : une revue critique de la littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 57(2), pages 193-224, avril-jui.
  3. Henry Tosi, 2008. "Quo Vadis? Suggestions for future corporate governance research," Journal of Management and Governance, Springer, vol. 12(2), pages 153-169, May.
  4. Gerhard Clemenz & Mona Ritthaler, 1992. "Credit markets with asymmetric information : a survey," Finnish Economic Papers, Finnish Economic Association, vol. 5(1), pages 12-26, Spring.
  5. Belli, Paolo, 2001. "How adverse selection affects the health insurance market," Policy Research Working Paper Series 2574, The World Bank.
  6. Felipe Balmaceda, 2004. "Uncertainty, Pay for Performance and Adverse Selection in a Competitive Labor Market," Documentos de Trabajo 196, Centro de Economía Aplicada, Universidad de Chile.

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