Competitive Insurance Markets Under Adverse Selection and Capacity Constraints

Roman Inderst and Achim Wambach

No 2269, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Ever since the seminal work by Rothschild and Stiglitz (1976) on competitive insurance markets under adverse selection the equilibrium-non-existence problem has been one of the major puzzles in insurance economics. We extend the original analysis by considering firms that face capacity constraints due to limited capital. Two scenarios are considered: if the demand at any insurer exceeds the capacity: either consumers are rationed, or they are served, but the insurer faces a larger risk of bankruptcy. We show under mild assumptions that a pure strategy equilibrium exists, where every consumer buys his appropriate Rothschild-Stiglitz contract.

Keywords: Asymmetric Information; Capacity Constraints; Competitive Equilibrium; Insurance Markets (search for similar items in EconPapers)
JEL-codes: C72 C78 D82 G22 (search for similar items in EconPapers)
Date: 1999-10
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Journal Article: Competitive insurance markets under adverse selection and capacity constraints (2001)
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