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A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection

  • Wanda Mimra
  • Achim Wambach

We extend the seminal Rothschild and Stiglitz (1976) model on competitive insurance markets with asymmetric information in the spirit of Wilson (1977)’s ‘anticipatory equilibrium’ by introducing an additional stage in which initial contracts can be withdrawn after observation of competitors’ contract offers. We show that an equilibrium always exists where consumers obtain their respective Wilson-Miyazaki-Spence (WMS) contract. Jointly profit-making contracts can also be sustained as equilibrium contracts. However, the second-best efficient WMS allocation is the unique equilibrium allocation under entry.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3412.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3412
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  1. Pierre Picard, 2014. "Participating Insurance Contracts and the Rothschild-Stiglitz Equilibrium Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 39(2), pages 153-175, September.
  2. 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.
  3. Pradeep Dubey & John Geanakoplos, 2001. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," Cowles Foundation Discussion Papers 1346, Cowles Foundation for Research in Economics, Yale University.
  4. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
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  7. Jeffrey M. Lacker & John A. Weinberg, 1999. "Coalition-Proof Allocations in Adverse-Selection Economies," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 24(1), pages 5-17, June.
  8. Alberto Bisin & Piero Gottardi, 2006. "Efficient Competitive Equilibria with Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 485-516, June.
  9. Asheim, G.B. & Nilssen, T., 1995. "Non-Discriminating Renogociation in a Competitive Insurance Market," Memorandum 03/1995, Oslo University, Department of Economics.
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  13. Jaynes, Gerald David, 1978. "Equilibria in monopolistically competitive insurance markets," Journal of Economic Theory, Elsevier, vol. 19(2), pages 394-422, December.
  14. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March.
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  16. 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.
  17. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  18. Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, vol. 55(2), pages 425-39, March.
  19. Ana B. Ania & Thomas Tröger & Wambach, 1989. "An Evolutionary Analysis of Insurance Markets," Vienna Economics Papers 9808, University of Vienna, Department of Economics.
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