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

Author

Listed:
  • Wanda Mimra
  • Achim Wambach

Abstract

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of Wilson (1977)’s ‘anticipatory equilibrium’ by introducing an additional stage in which initial contracts can be withdrawn after observation of competitors’ contract offers.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.

Suggested Citation

  • 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.
  • Handle: RePEc:ces:ceswps:_3412
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp3412.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Barlevy, Gadi, 2014. "A leverage-based model of speculative bubbles," Journal of Economic Theory, Elsevier, vol. 153(C), pages 459-505.
    2. 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.
    3. Mimra, Wanda & Wambach, Achim, 2016. "A note on uniqueness in game-theoretic foundations of the reactive equilibrium," Economics Letters, Elsevier, pages 39-43.
    4. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
    5. De Feo, Giuseppe & Hindriks, Jean, 2014. "Harmful competition in insurance markets," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 213-226.
    6. Schumacher, Heiner, 2016. "Insurance, self-control, and contract flexibility," European Economic Review, Elsevier, vol. 83(C), pages 220-232.
    7. Bannier, Christina E. & Feess, Eberhard & Packham, Natalie, 2014. "Incentive schemes, private information and the double-edged role of competition for agents," CFS Working Paper Series 475, Center for Financial Studies (CFS).
    8. 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.
    9. Anastasios Dosis, 2016. "A More General Definition of Equilibrium in Markets with Adverse Selection," Working Papers hal-01285188, HAL.
    10. Anastasios Dosis, 2016. "An Efficient Mechanism for Competitive Markets with Adverse Selection," Working Papers hal-01282772, HAL.
    11. Dosis, Anastasios, 2016. "Investment, Adverse Selection and Optimal Redistributive Taxation," ESSEC Working Papers WP1605, ESSEC Research Center, ESSEC Business School.

    More about this item

    Keywords

    asymmetric information; competitive insurance market; contract withdrawal;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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