Adverse Selection and Non-Exclusive Contracts

Laurence Ales and Pricila Maziero

No 2010-E61, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: This paper studies the Rothschild and Stiglitz (1976) adverse selection environment, relaxing the assumption of exclusivity of insurance contracts. Agents can engage in multiple insurance contracts simultaneously, and the terms of these contracts are not observed by other firms. Insurance providers behave non-cooperatively and compete offering menus of insurance contracts from an unrestricted contract space. We de- rive conditions under which a separating equilibrium exists and fully characterize it. The unique equilibrium allocation consists of agents with a lower probability of acci- dent purchasing no insurance and agents with higher accident probability buying the actuarially-fair level of insurance. The equilibrium allocation also constitutes a linear price schedule for insurance. To sustain the equilibrium allocation, firms must offer latent contracts. These contracts are necessary to prevent deviations by other firms; in particular they can prevent cream-skimming strategies. As in Rothschild and Stiglitz (1976), pooling equilibrium still fails to exists.

Date: 2009-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.andrew.cmu.edu/user/ales/adverse.pdf

Related works:
Working Paper: Adverse Selection and Non-exclusive Contracts (2009)
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:cmu:gsiawp:1485666472

Ordering information: This working paper can be ordered from
https://student-3k.t ... /gsiadoc/GSIA_WP.asp

Access Statistics for this paper

More papers in GSIA Working Papers from Carnegie Mellon University, Tepper School of Business Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890.
Bibliographic data for series maintained by Steve Spear ().