Negative Externalities and Equilibrium Existence in Competitive Markets with Adverse Selection
Rothschild and Stiglitz (1976) show that there need not exist a competitive equilibrium in markets with adverse selection. Building on their framework we demonstrate that externalities between agents − an agent's utility upon accepting a contract depends on the average type attracted by the respective principal − can solve the equilibrium existence problem, even when the size of the externalities is arbitrarily small. Our result highlights the degree of control a principal has over the attractiveness of his contracts as an important feature for equilibrium existence, thereby offering a new perspective on existing theories of competition in markets with adverse selection.
|Date of creation:||Apr 2009|
|Date of revision:|
|Contact details of provider:|| Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany|
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
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.:
- Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
- Douglas Gale, 1992. "A Walrasian Theory of Markets with Adverse Selection," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 229-255.
- In-Koo Cho & David M. Kreps, 1997.
"Signaling Games and Stable Equilibria,"
Levine's Working Paper Archive
896, David K. Levine.
- Riley, John G, 1979.
Econometric Society, vol. 47(2), pages 331-59, March.
- Dalmazzo, Alberto, 2002. " Technological Complexity, Wage Differentials and Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(4), pages 515-30, December.
- Pradeep Dubey & John Geanakoplos, 2001.
"Competitive Pooling: Rothschild-Stiglitz Reconsidered,"
Cowles Foundation Discussion Papers
1346R2, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
- P. Dubey & J. Geanakoplos, 2001. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," Department of Economics Working Papers 01-10, Stony Brook University, Department of Economics.
- Pradeep Dubey & John Geanakoplos, 2001. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," Cowles Foundation Discussion Papers 1346, Cowles Foundation for Research in Economics, Yale University.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp4125. 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: (Mark Fallak)
If references are entirely missing, you can add them using this form.