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Adverse Selection and Non-exclusive Contracts

Author

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  • Laurence Ales

    (Tepper School of Business, Carnegie Mellon University)

Abstract

This paper studies the Rothschild and Stiglitz (1976) insurance environment relaxing the assumption of exclusivity of insurance contracts. Agents can engage in multiple insurance contract simultaneously and the terms of these contracts are not observed by other firms. Insurance providers behave non-cooperativelly and compete offering menus of insurance contracts from an unrestricted contract space. We show that the Rothschild and Stiglitz equilibrium allocation is not an equilibrium in the presence of non-exclusive contracting, since firms will offer latent contracts to prevent deviation by other firms that prevent separation of the agents. This possibility also implies that latent menus can prevent cream-skimming strategies, however pooling equilibrium still fails to exists. We derive the conditions under which a separating equilibrium exists and fully characterize it. The equilibrium allocation consists of agents with a lower probability of accident purchasing no insurance and agents with higher accident probability buying the actuarilly fair competitive level of insurance. To sustain the equilibrium allocation firms must offer latent contracts. The equilibrium allocation also constitute a linear price schedule for insurance.

Suggested Citation

  • Laurence Ales, 2009. "Adverse Selection and Non-exclusive Contracts," 2009 Meeting Papers 854, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:854
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Han, Seungjin, 2014. "Implicit collusion in non-exclusive contracting under adverse selection," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 85-95.
    2. Frédéric Loss & Gwanaël Piaser, 2013. "Linear Prices Equilibria and Nonexclusive Insurance Market," Working Papers hal-00870113, HAL.
    3. Joseph E. Stiglitz & Jungyoll Yun & Andrew Kosenko, 2017. "Equilibrium in a Competitive Insurance Market Under Adverse Selection with Endogenous Information," NBER Working Papers 23556, National Bureau of Economic Research, Inc.
    4. 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.
    5. Jaynes, Gerald D., 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Working Papers 91, Yale University, Department of Economics.
    6. Philip Bond & Yaron Leitner, 2013. "Market run-ups, market freezes, inventories, and leverage," Working Papers 13-14, Federal Reserve Bank of Philadelphia.
    7. Tobias Broer & Marek Kapicka & Paul Klein, 2017. "Consumption Risk Sharing with Private Information and Limited Enforcement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 170-190, January.
    8. Gerald D. Jaynes, 2018. "Endogenous Beliefs and Institutional Structure in Competitive Equilibrium with Adverse Selection," Cowles Foundation Discussion Papers 2159, Cowles Foundation for Research in Economics, Yale University.
    9. Loss, Frédéric & Piaser, Gwenaël, 2019. "Linear price equilibria in a non-exclusive insurance market," Journal of Mathematical Economics, Elsevier, vol. 81(C), pages 22-30.
    10. Stephens, Eric & Thompson, James R., 2017. "Information asymmetry and risk transfer markets," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 88-99.
    11. Ales, Laurence & Maziero, Pricila, 2016. "Non-exclusive dynamic contracts, competition, and the limits of insurance," Journal of Economic Theory, Elsevier, vol. 166(C), pages 362-395.
    12. Gerald D. Jaynes, 2011. "Equilibrium and Strategic Communication in the Adverse Selection Insurance Model," Levine's Working Paper Archive 786969000000000243, David K. Levine.
    13. repec:ipg:wpaper:2014-042 is not listed on IDEAS
    14. Philip Bond & Yaron Leitner, 2012. "Market run-ups, market freezes, inventories, and leverage," Working Papers 12-8, Federal Reserve Bank of Philadelphia.
    15. Joseph E. Stiglitz & Jungyoll Yun & Andrew Kosenko, 2019. "Characterization, Existence, and Pareto Optimality in Markets with Asymmetric Information and Endogenous and Asymmetric Disclosures: Basic Analytics of Revisiting Rothschild-Stiglitz," NBER Working Papers 26251, National Bureau of Economic Research, Inc.
    16. Tobias Broer & Marek Kapicka & Paul Klein, 2017. "Consumption Risk Sharing with Private Information and Limited Enforcement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 170-190, January.

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