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Equilibrium in Insurance Markets With Adverse Selection When Insurers Pay Policy Dividends

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  • Pierre Picard

Abstract

We show that an equilibrium always exists in the Rothschild–Stiglitz insurance market model with adverse selection and an arbitrary number of risk types, when insurance contracts include policy dividend rules. The Miyazaki–Wilson–Spence state‐contingent allocation is an equilibrium allocation (defined as a set of type‐dependent lotteries sustained at a symmetric equilibrium of a market game), and it is the only one when out‐of‐equilibrium beliefs satisfy a robustness criterion. It is shown that stock insurers and mutuals may coexist, with stock insurers offering insurance coverage at actuarial price and mutuals cross‐subsidizing risks.

Suggested Citation

  • Pierre Picard, 2019. "Equilibrium in Insurance Markets With Adverse Selection When Insurers Pay Policy Dividends," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(4), pages 887-914, December.
    • Handle: RePEc:bla:jrinsu:v:86:y:2019:i:4:p:887-914
    DOI: 10.1111/jori.12243
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    Cited by:

    1. Dosis, Anastasios, 2022. "Price caps and efficiency in markets with adverse selection," Journal of Mathematical Economics, Elsevier, vol. 99(C).
    2. Georges Dionne & Nathalie Fombaron & Wanda Mimra, 2025. "Adverse Selection in Insurance," Springer Books, in: Georges Dionne (ed.), Handbook of Insurance, edition 0, pages 165-221, Springer.
    3. Gemmo, Irina & Kubitza, Christian & Rothschild, Casey G., 2018. "The existence of the Miyazaki-Wilson-Spence equilibrium with continuous type distributions," ICIR Working Paper Series 32/18, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    4. Gemmo, Irina & Kubitza, Christian & Rothschild, Casey, 2020. "Constrained efficient equilibria in selection markets with continuous types," Journal of Public Economics, Elsevier, vol. 190(C).
    5. Wanda Mimra & Achim Wambach, 2019. "Contract withdrawals and equilibrium in competitive markets with adverse selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(4), pages 875-907, June.

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