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On Rothschild–Stiglitz as Competitive Pooling

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  • Alberto Martin

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Abstract

Dubey and Geanakoplos [2002] have developed a theory of competitive pooling, which incorporates adverse selection and signaling into general equilibrium. By recasting the Rothschild-Stiglitz model of insurance in this framework, they find that a separating equilibrium always exists and is unique. We prove that their uniqueness result is not a consequence of the framework, but rather of their definition of refined equilibria. When other types of perturbations are used, the model allows for many pooling allocations to be supported as such: in particular, this is the case for pooling allocations that Pareto dominate the separating equilibrium.

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File URL: http://hdl.handle.net/10.1007/s00199-006-0089-3
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 31 (2007)
Issue (Month): 2 (May)
Pages: 371-386

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Handle: RePEc:spr:joecth:v:31:y:2007:i:2:p:371-386

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Related research

Keywords: Competitive pooling; Insurance; Adverse selection; Signalling; Refined equilibrium; Separating equilibrium; D4; D5; D41; D52; D81; D82;

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References

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  1. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  2. Gale, Douglas, 1992. "A Walrasian Theory of Markets with Adverse Selection," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 229-55, April.
  3. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
  4. Pradeep Dubey & John Geanakoplos, 2002. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1529-1570, November.
  5. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-37, September.
  6. Gale, Douglas, 1996. "Equilibria and Pareto Optima of Markets with Adverse Selection," Economic Theory, Springer, vol. 7(2), pages 207-35, February.
  7. Pradeep Dubey & John Geanakoplos, 2001. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," Cowles Foundation Discussion Papers 1346R2, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
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Cited by:
  1. Alberto Martin, 2009. "A model of collateral, investment and adverse selection," Economics Working Papers 1136, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Alberto Martin, 2004. "Endogenous credit cycles," Economics Working Papers 916, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2008.
  3. Martin, Alberto, 2011. "Adverse Selection, Credit, and Efficiency: the Case of the Missing Market," CEPR Discussion Papers 8226, C.E.P.R. Discussion Papers.
  4. Theodoros M. Diasakos & Kostas Koufopoulos, . "Efficient Nash Equilibrium under Adverse Selection," Discussion Paper Series, Department of Economics 201313, Department of Economics, University of St. Andrews.
  5. Rajdeep Sengupta, 2008. "Lending to uncreditworthy borrowers," Working Papers 2007-044, Federal Reserve Bank of St. Louis.
  6. Georges Dionne & Casey G. Rothschild, 2014. "Economic Effects of Risk Classification Bans," Cahiers de recherche 1420, CIRPEE.

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