EconPapers    
Economics at your fingertips  
 

(Neutrally) Optimal Mechanism under Adverse Selection: The canonical insurance problem

Theodoros M. Diasakos and Kostas Koufopoulos

Games and Economic Behavior, 2018, vol. 111, issue C, 159-186

Abstract: This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz (1976). We extend the three-stage game in Hellwig (1987) by allowing firms to endogenously choose whether or not to pre-commit on their contractual offers (menus). We show how this mechanism can deliver the Miyazaki–Wilson–Spence allocation as the unique perfect-Bayesian equilibrium. This allocation is the unique incentive-efficient and individually-rational maximizer of the utility of the most profitable type. In fact, given that the informed player has only two types, it is the unique core allocation and thus the unique neutral optimum in the sense of Myerson (1983).

Keywords: Insurance market; Adverse selection; Interim incentive efficiency; Neutral optimum (search for similar items in EconPapers)
JEL-codes: D86 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0899825618300691
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:111:y:2018:i:c:p:159-186

Access Statistics for this article

Games and Economic Behavior is currently edited by E. Kalai

More articles in Games and Economic Behavior from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2018-12-22
Handle: RePEc:eee:gamebe:v:111:y:2018:i:c:p:159-186