Equilibrium and Strategic Communication in the Adverse Selection Insurance Model

Gerald D. Jaynes
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Gerald D. Jaynes: Yale University

Working Papers from Yale University, Department of Economics

Abstract: Shows equilibrium always exists (Rothschild-Stiglitz-Wilson model) when firms enforce policy exclusivity via strategic (profit-maximizing) communication of client purchases. Strategic communication induces two equilibrium types: partial communication of purchase information or non-communication which exhibits a lemon effect (low-risk purchase no insurance). Nonetheless, Jaynes' configuration (Jaynes; Beaudry & Poitevin) allocating both risk-types a low-coverage pooling contract and high-risk supplementary expensive coverage always characterizes equilibrium including Perfect Bayesian Equilibrium in Hellwig's two-stage framework where inter-firm informational asymmetries impose additional "competitive" features. Adverse selection induces salient features of financial markets: Bertrand-Edgeworth competition, latent contracts, strategic exclusivity-policy cancellation tactics, market institutions for sharing information.

JEL-codes: D82 G22 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-com, nep-cse, nep-cta and nep-ias
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Citations: View citations in EconPapers (14)

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