An Evolutionary Analysis of Insurance Markets Under Adverse Selection
AbstractSince 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.
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Bibliographic InfoPaper provided by Washington St. Louis - School of Business and Political Economy in its series Papers with number 9808.
Length: 21 pages
Date of creation: 1998
Date of revision:
Contact details of provider:
Postal: WASHINGTON UNIVERSITY IN ST-LOUIS, SCHOOL OF BUSINESS AND CENTER IN POLITICAL ECONOMY, ST-LOUIS MISSOURI 63130 U.S.A.
Web page: http://www.olin.wustl.edu/
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INSURANCE MARKET ; ADVERSE SELECTION ; GAME THEORY ; INFORMATION;
Other versions of this item:
- Ana B. ANIA, 1998. "An Evolutionary Analysis of Insurance Markets under Adverse Selection," Vienna Economics Papers 9801, University of Vienna, Department of Economics.
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
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- Alos-Ferrer, Carlos & Ania, Ana B., 2001. "Local equilibria in economic games," Economics Letters, Elsevier, vol. 70(2), pages 165-173, February.
- Inderst, Roman & Wambach, Achim, 1999.
"Competitive Insurance Markets Under Adverse Selection and Capacity Constraints,"
CEPR Discussion Papers
2269, C.E.P.R. Discussion Papers.
- Inderst, Roman & Wambach, Achim, 2001. "Competitive insurance markets under adverse selection and capacity constraints," European Economic Review, Elsevier, vol. 45(10), pages 1981-1992, December.
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