Competitive equilibrium in insurance markets under adverse selection and non-expected utility

Niousha Shahidi

Journal of Risk

Abstract: ABSTRACT In this paper we determine the separating equilibrium contracts for high and low risks in a Rothschild-Stiglitz competitive market, under the monotone likelihood ratio property. We suppose that the policyholders have nonexpected utility, order risks according to first-order stochastic dominance and moreover that the high risks are strictly weakly risk averse. We prove that the high risks obtain full coverage. We determine the low risks' contract as an optimal solution of a non-convex problem. Under technical conditions, we show that the non-convex problem has a solution and we characterize the optimal solution.

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