Efficient Nash Equilibrium under Adverse Selection

Theodoros Diasakos and Kostas Koufopoulos

No 215, Carlo Alberto Notebooks from Collegio Carlo Alberto

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).

Keywords: Insurance Market; Adverse Selection; Incentive Efficiency (search for similar items in EconPapers)
JEL-codes: D86 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2011
New Economics Papers: this item is included in nep-cta, nep-gth, nep-ias and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Working Paper: Efficient Nash Equilibrium under Adverse Selection (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:215

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