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Efficient Nash Equilibrium under Adverse Selection

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  • Theodoros M. Diasakos
  • Kostas Koufopoulos

Abstract

This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz (1976). We propose a simple extension of the game-theoretic structure in Hellwig (1987) under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson (1983).

Suggested Citation

  • Theodoros M. Diasakos & Kostas Koufopoulos, 2011. "Efficient Nash Equilibrium under Adverse Selection," Carlo Alberto Notebooks 215, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:215
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    References listed on IDEAS

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    Cited by:

    1. Nick Netzer & Florian Scheuer, 2014. "A Game Theoretic Foundation Of Competitive Equilibria With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 399-422, May.
    2. Dosis, Anastasios, 2016. "A More General Definition of Equilibrium in Markets with Adverse Selection," ESSEC Working Papers WP1607, ESSEC Research Center, ESSEC Business School.
    3. Anastasios Dosis, 2016. "A More General Definition of Equilibrium in Markets with Adverse Selection," Working Papers hal-01285188, HAL.
    4. Anastasios Dosis, 2016. "On Signalling and Screening in Markets with Asymmetric Information," Working Papers hal-01285190, HAL.
    5. Anastasios Dosis, 2016. "An Efficient Mechanism for Competitive Markets with Adverse Selection," Working Papers hal-01282772, HAL.
    6. Anastasios Dosis, 2016. "Investment, Adverse Selection and Optimal Redistributive Taxation," Working Papers hal-01285163, HAL.
    7. Dosis, Anastasios, 2016. "On Signalling and Screening," ESSEC Working Papers WP1608, ESSEC Research Center, ESSEC Business School.
    8. Alessandro Citanna & Paolo Siconolfi, 2016. "Incentive Efficient Price Systems In Large Insurance Economies With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(3), pages 1027-1056, August.
    9. Dosis, Anastasios, 2016. "Investment, Adverse Selection and Optimal Redistributive Taxation," ESSEC Working Papers WP1605, ESSEC Research Center, ESSEC Business School.
    10. Kostas Koufopoulos & Roman Kozhan, 2016. "Optimal insurance under adverse selection and ambiguity aversion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(4), pages 659-687, October.

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    More about this item

    Keywords

    Insurance Market; Adverse Selection; Incentive Efficiency;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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