An Evolutionary Analysis of Insurance Markets Under Adverse Selection

Since the seminal work by Rothschild and Stiglitz on competitive insurance markets under adverse selection the problem of non-existence of equilibrium hat puzzled many economists. In this paper we approach this problem from an evolutionary point of view. In a dynamic model insurance companies remove lossmaking contracts from the market and copy profit making ones. Occasionally, they also experiment, adding new contracts or removing current ones arbitrarily. We show that the Rothschild-Stiglitz outcome arises in the long run if it cinstitutes an equilibrium in the static framework, but also if it is not an equilibrium, provides that firms only experiment with contracts in the vicinity of their current portfolio.