Negative Externalities and Equilibrium Existence in Competitive Markets with Adverse Selection

Ferdinand von Siemens and Michael Kosfeld

No 4125, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: 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.

Keywords: asymmetric information; competition; adverse selection; externality (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2009-04
New Economics Papers: this item is included in nep-cta, nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published - revised version published as 'Team production in competitive labor markets with adverse selection' in: European Economic Review, 2014, 68, 181–198

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