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Adverse Selection and Non-Exclusive Contracts

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Author Info

  • Laurence Ales
  • Pricila Maziero

Abstract

This paper studies the Rothschild and Stiglitz (1976) adverse selection environment, relaxing the assumption of exclusivity of insurance contracts. Agents can engage in multiple insurance contracts simultaneously, and the terms of these contracts are not observed by other firms. Insurance providers behave non-cooperatively and compete offering menus of insurance contracts from an unrestricted contract space. We de- rive conditions under which a separating equilibrium exists and fully characterize it. The unique equilibrium allocation consists of agents with a lower probability of acci- dent purchasing no insurance and agents with higher accident probability buying the actuarially-fair level of insurance. The equilibrium allocation also constitutes a linear price schedule for insurance. To sustain the equilibrium allocation, firms must offer latent contracts. These contracts are necessary to prevent deviations by other firms; in particular they can prevent cream-skimming strategies. As in Rothschild and Stiglitz (1976), pooling equilibrium still fails to exists.

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Bibliographic Info

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2010-E61.

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Date of creation: Dec 2009
Date of revision:
Handle: RePEc:cmu:gsiawp:1485666472

Contact details of provider:
Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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Cited by:
  1. Philip Bond & Yaron Leitner, 2013. "Market run-ups, market freezes, inventories, and leverage," Working Papers 13-14, Federal Reserve Bank of Philadelphia, revised 04 Feb 2014.
  2. Frédéric Loss & Gwenaël Piaser, 2014. "Linear Prices Equilibria and Nonexclusive Insurance Market," Working Papers 2014-042, Department of Research, Ipag Business School.
  3. Han, Seungjin, 2011. "Implicit Collusion in Non-Exclusive Contracting under Adverse Selection," Microeconomics.ca working papers seungjin_han-2011-10, Vancouver School of Economics, revised 02 Apr 2013.
  4. Gerald D. Jaynes, 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Levine's Working Paper Archive 786969000000000243, David K. Levine.
  5. Philip Bond & Yaron Leitner, 2012. "Market run-ups, market freezes, inventories, and leverage," Working Papers 12-8, Federal Reserve Bank of Philadelphia.
  6. Jaynes, Gerald D., 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Working Papers 91, Yale University, Department of Economics.

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