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On Rothschild-Stiglitz as competitive pooling

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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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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 917.

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Date of creation: Aug 2003
Date of revision: Jan 2006
Handle: RePEc:upf:upfgen:917

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Web page: http://www.econ.upf.edu/

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Keywords: Competitive pooling; insurance; adverse selection; signalling; refined equilibrium; separating equilibrium;

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  1. 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.
  2. E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
  3. 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.
  4. Douglas Gale, 1994. "Equilibria and Pareto Optima of Markets with Adverse Selection," Papers 0046, Boston University - Industry Studies Programme.
  5. Hellwig,Martin, 1986. "Some recent developments in the theory of competition in markets with adverse selection," Discussion Paper Serie A 82, University of Bonn, Germany.
  6. Pradeep Dubey & John Geanakoplos, 2002. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1529-1570, November.
  7. Gale, Douglas, 1992. "A Walrasian Theory of Markets with Adverse Selection," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 229-55, April.
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Cited by:
  1. Alberto Martin, 2008. "Adverse selection, credit and efficiency: The case of the missing market," Economics Working Papers 1085, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2009.
  2. Theodoros M. Diasakos & Kostas Koufopoulos, 2011. "Efficient Nash Equilibrium under Adverse Selection," Carlo Alberto Notebooks 215, Collegio Carlo Alberto.
  3. Alberto Martin, 2004. "Endogenous credit cycles," Economics Working Papers 916, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2008.
  4. Rajdeep Sengupta, 2008. "Lending to uncreditworthy borrowers," Working Papers 2007-044, Federal Reserve Bank of St. Louis.
  5. Alberto Martin, 2009. "A model of collateral, investment and adverse selection," Economics Working Papers 1136, Department of Economics and Business, Universitat Pompeu Fabra.

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