A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection

Wanda Mimra and Achim Wambach

No 3412, CESifo Working Paper Series from CESifo

Abstract: We extend the seminal Rothschild and Stiglitz (1976) model on competitive insurance markets with asymmetric information in the spirit of Wilson (1977)’s ‘anticipatory equilibrium’ by introducing an additional stage in which initial contracts can be withdrawn after observation of competitors’ contract offers. We show that an equilibrium always exists where consumers obtain their respective Wilson-Miyazaki-Spence (WMS) contract. Jointly profit-making contracts can also be sustained as equilibrium contracts. However, the second-best efficient WMS allocation is the unique equilibrium allocation under entry.

Keywords: asymmetric information; competitive insurance market; contract withdrawal (search for similar items in EconPapers)
JEL-codes: C72 D82 G22 L10 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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