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A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection

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  • Wanda Mimra
  • Achim Wambach

Abstract

We extend the seminal Rothschild and Stiglitz (1976) model on competitive insurance markets with asymmetric information in the spirit of Wilson (1977)’s ‘anticipatory equilibrium’ by introducing an additional stage in which initial contracts can be withdrawn after observation of competitors’ contract offers. We show that an equilibrium always exists where consumers obtain their respective Wilson-Miyazaki-Spence (WMS) contract. Jointly profit-making contracts can also be sustained as equilibrium contracts. However, the second-best efficient WMS allocation is the unique equilibrium allocation under entry.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-04/cesifo1_wp3412.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3412.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3412

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Related research

Keywords: asymmetric information; competitive insurance market; contract withdrawal;

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References

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  1. Pierre Picard, 2009. "Participating insurance contracts and the Rothschild-Stiglitz equilibrium puzzle," Working Papers hal-00413825, HAL.
  2. 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).
  3. Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," NajEcon Working Paper Reviews, www.najecon.org 814577000000000462, www.najecon.org.
  4. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 78(6), pages 1823-1862, November.
  5. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262025760, December.
  6. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, Elsevier, vol. 31(1-2), pages 319-325.
  7. Asheim, G.B. & Nilssen, T., 1994. "Non-Discriminating Renegotiation in a Competitive Insurance Market," Papers, Laval - Laboratoire Econometrie 25, Laval - Laboratoire Econometrie.
  8. Crocker, Keith J. & Snow, Arthur, 1985. "The efficiency of competitive equilibria in insurance markets with asymmetric information," Journal of Public Economics, Elsevier, Elsevier, vol. 26(2), pages 207-219, March.
  9. Inderst, Roman & Wambach, Achim, 2001. "Competitive insurance markets under adverse selection and capacity constraints," European Economic Review, Elsevier, Elsevier, vol. 45(10), pages 1981-1992, December.
  10. Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 425-39, March.
  11. Ana B. Ania & Thomas Tröger & Wambach, 1989. "An Evolutionary Analysis of Insurance Markets," Vienna Economics Papers, University of Vienna, Department of Economics 9808, University of Vienna, Department of Economics.
  12. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, Elsevier, vol. 16(2), pages 167-207, December.
  13. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, Elsevier, vol. 10(3), pages 427-447, December.
  14. Alberto Bisin & Piero Gottardi, 2006. "Efficient Competitive Equilibria with Adverse Selection," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(3), pages 485-516, June.
  15. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
  16. Jeffrey M. Lacker & John A. Weinberg, 1999. "Coalition-Proof Allocations in Adverse-Selection Economies," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 24(1), pages 5-17, June.
  17. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 331-59, March.
  18. 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, MIT Press, vol. 90(4), pages 630-49, November.
  19. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(1), pages 27-41, January.
  20. Pradeep Dubey & John Geanakoplos, 2001. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1346R2, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
  21. Ania, Ana B. & Troger, Thomas & Wambach, Achim, 2002. "An evolutionary analysis of insurance markets with adverse selection," Games and Economic Behavior, Elsevier, Elsevier, vol. 40(2), pages 153-184, August.
  22. Jaynes, Gerald David, 1978. "Equilibria in monopolistically competitive insurance markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 19(2), pages 394-422, December.
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Cited by:
  1. Daniel L. McFadden & Carlos E. Noton & Pau Olivella, 2012. "Remedies for Sick Insurance," NBER Working Papers 17938, National Bureau of Economic Research, Inc.
  2. Ferdinand von Siemens & Michael Kosfeld, 2014. "Team Production in Competitive Labor Markets with Adverse Selection," CESifo Working Paper Series 4638, CESifo Group Munich.

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