A GAME THEORETIC FOUNDATION OF COMPETITIVE EQUILIBRIA WITH ADVERSE SELECTION

Nick Netzer and Florian Scheuer

International Economic Review, 2014, vol. 55, issue 2, 399-422

Abstract: We construct an extensive form game that captures competitive markets with adverse selection. 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. In fact, when withdrawal is costless, the set of equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that continue to exist for small withdrawal costs. We show that the Miyazaki–Wilson contracts are the unique robust equilibrium outcome.

Date: 2014
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https://doi.org/10.1111/iere.12054

Related works:
Working Paper: A Game Theoretic Foundation of Competitive Equilibria with Adverse Selection (2012)
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