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Incentive Efficient Price Systems In Large Insurance Economies With Adverse Selection

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  • Alessandro Citanna
  • Paolo Siconolfi

Abstract

We decentralize incentive efficient allocations in large adverse selection economies by introducing a competitive market for mechanisms, that is, for menus of contracts. Facing a budget constraint, informed individuals purchase (lottery) tickets to enter mechanisms, whereas firms sell tickets and supply slots at mechanisms at given prices. Beyond optimization, market clearing, and rational expectations, an equilibrium requires that firms cannot favorably change, or cut, prices. An equilibrium exists and is incentive efficient. An equilibrium can be computed as the solution to a programming problem that selects the incentive efficient outcome preferred by the highest type within an appropriately defined set. For two‐types economies, this is the only equilibrium outcome.

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  • Alessandro Citanna & Paolo Siconolfi, 2016. "Incentive Efficient Price Systems In Large Insurance Economies With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(3), pages 1027-1056, August.
  • Handle: RePEc:wly:iecrev:v:57:y:2016:i:3:p:1027-1056
    DOI: 10.1111/iere.12184
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    References listed on IDEAS

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