A Game Theoretic Foundation of Competitive Equilibria with Adverse Selection

Nick Netzer and Florian Scheuer

No 18471, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We construct a fully specified extensive form game that captures competitive markets with adverse selection. In particular, it allows firms to offer any finite set of contracts, so that cross-subsidization is not ruled out. Moreover, firms can withdraw from the market after initial contract offers have been observed. We show that a subgame perfect equilibrium always exists and that, in fact, when withdrawal is costless, the set of subgame perfect equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that exist both when withdrawal costs are zero and when they are arbitrarily small but strictly positive. We show that the Miyazaki-Wilson contracts are the unique robust equilibrium outcome of our game. This outcome is always constrained efficient and involves cross-subsidization from low to high risk agents that is increasing in the share of low risks in the population under weak conditions on risk preferences.

JEL-codes: C73 D02 D82 D86 G22 H1 L1 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-gth and nep-mic
Note: EFG IO PE
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Citations: View citations in EconPapers (10)

Published as 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, pages 399-422, 05.

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Journal Article: A GAME THEORETIC FOUNDATION OF COMPETITIVE EQUILIBRIA WITH ADVERSE SELECTION (2014)
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