Decentralizing Incentive Efficient Allocations of Economies with Adverse Selection
We study competitive economies with adverse selection and fully exclusive contractual relationships. We consider economies where agents are privately informed over the probability distribution of their endowments, and trade to insure against this uncertainty. As in Prescott-Townsend (1984), we model exclusivity by imposing the incentive compatibility constraints directly on the agents' consumption possibility set. In this set-up, we identify the externality associated with the presence of adverse selection as a special form of consumption externality. We consider a structure of markets which allows to internalize such externality, for which we show that competitive equilibria exist and are incentive efficient. On the other hand, when this 'expanded' set of markets required to internalize such externality does not exist, competitive equilibria are shown to be, typically, not incentive efficient, but to satisfy an appropriately defined notion of third best efficiency. Appropriate versions of the second welfare theorem for these two market structures are also established.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Magill & Martine Quinzii, .
"Incentives And Risk Sharing In A Stock Market Equilibrium,"
Department of Economics
96-12, California Davis - Department of Economics.
- Martine Quinzii & Michael Magill, 2003. "Incentives and Risk Sharing in a Stock Market Equilibrium," Working Papers 9612, University of California, Davis, Department of Economics.
- Edward C Prescott & Robert M Townsend, 1997.
"General Competitive Analysis in an Economy with Private Information,"
Levine's Working Paper Archive
1578, David K. Levine.
- Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
- KOHLBERG, Elon & MERTENS, Jean-François, .
"On the strategic stability of equilibria,"
CORE Discussion Papers RP
-716, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Bel? Jerez, 2000.
"General Equilibrium with Asymmetric Information: a Dual Approach,"
UFAE and IAE Working Papers
510.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Belen Jerez, 2000. "General Equilibrium with Asymmetric Information: A Dual Approach," Econometric Society World Congress 2000 Contributed Papers 1497, Econometric Society.
- Hellwig, Martin, 1987.
"Some recent developments in the theory of competition in markets with adverse selection ,"
European Economic Review,
Elsevier, vol. 31(1-2), pages 319-325.
- Hellwig,Martin, 1986. "Some recent developments in the theory of competition in markets with adverse selection," Discussion Paper Serie A 82, University of Bonn, Germany.
- Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 879R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1989.
- Cole, Harold Linh, 1989. "General Competitive Analysis in an Economy with Private Information: Comment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 249-52, February.
- Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
- John G. Riley, 1976.
UCLA Economics Working Papers
071, UCLA Department of Economics.
- Gale, Douglas, 1992. "A Walrasian Theory of Markets with Adverse Selection," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 229-55, April.
- Bisin, Alberto & Gottardi, Piero, 1999.
"Competitive Equilibria with Asymmetric Information,"
Journal of Economic Theory,
Elsevier, vol. 87(1), pages 1-48, July.
- Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, David K. Levine.
- 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.
- Prescott, Edward C & Townsend, Robert M, 1984.
"Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard,"
Econometric Society, vol. 52(1), pages 21-45, January.
- Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
- Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:0855. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.