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Competitive insurance markets under adverse selection and capacity constraints

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  • Inderst, Roman
  • Wambach, Achim

Abstract

Ever since the seminal work by Rothschild and Stiglitz (1976) on competitive insurance markets under adverse selection the equilibrium-non-existence problem has been one of the major puzzles in insurance economics. We extend the original analysis by considering firms that face capacity constraints due to limited capital. Two scenarios are considered: if the demand at any insurer exceeds the capacity: either consumers are rationed, or they are served, but the insurer faces a larger risk of bankruptcy. We show under mild assumptions that a pure strategy equilibrium exists, where every consumer buys his appropriate Rothschild-Stiglitz contract.
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Suggested Citation

  • 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.
  • Handle: RePEc:eee:eecrev:v:45:y:2001:i:10:p:1981-1992
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. von Siemens, Ferdinand A. & Kosfeld, Michael, 2014. "Team production in competitive labor markets with adverse selection," European Economic Review, Elsevier, vol. 68(C), pages 181-198.
    2. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
    3. Inderst, Roman, 2005. "Matching markets with adverse selection," Journal of Economic Theory, Elsevier, vol. 121(2), pages 145-166, April.
    4. Laurence Ales, 2009. "Adverse Selection and Non-exclusive Contracts," 2009 Meeting Papers 854, Society for Economic Dynamics.
    5. Wanda Mimra & Achim Wambach, 2014. "New Developments in the Theory of Adverse Selection in Competitive Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(2), pages 136-152, September.
    6. Georges Dionne & Nathalie Fombaron & Neil Doherty, 2012. "Adverse Selection in Insurance Contracting," Cahiers de recherche 1231, CIRPEE.
    7. Ania, Ana B. & Troger, Thomas & Wambach, Achim, 2002. "An evolutionary analysis of insurance markets with adverse selection," Games and Economic Behavior, Elsevier, vol. 40(2), pages 153-184, August.
    8. Nick Netzer & Florian Scheuer, 2014. "A Game Theoretic Foundation Of Competitive Equilibria With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 399-422, May.
    9. Willington Manuel & Alegría Alexander, 2012. "Collusion in a One-Period Insurance Market with Adverse Selection," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-32, April.
    10. Wanda Mimra & Achim Wambach, 2011. "A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection," CESifo Working Paper Series 3412, CESifo Group Munich.
    11. Michael Sonnenholzner & Achim Wambach, 2009. "On the Role of Patience in an Insurance Market With Asymmetric Information," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 323-341.
    12. Pierre Picard, 2016. "Equilibrium in insurance markets with adverse selection when insurers pay policy dividends," Working Papers hal-01206073, HAL.
    13. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, Elsevier.
    14. Raduna, Daniela Viviana & Roman, Mihai Daniel, 2011. "Risk aversion influence on insurance market," MPRA Paper 37725, University Library of Munich, Germany, revised 01 Feb 2012.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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