Endogenous Beliefs and Institutional Structure in Competitive Equilibrium with Adverse Selection

Gerald D. Jaynes ()
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Gerald D. Jaynes: Department of Economics, Yale University, https://economics.yale.edu/people/faculty/gerald-jaynes

No 2159, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: I model financial markets that structure decision-making into discrete points separating contract offers, applications, and acceptance/denial decisions. Endogenous beliefs about applicants' risk types emerge as the institutional process extracts private information allowing uninformed firms to infer risk qualities by comparing applications of many consumers. Endogenous beliefs and low-risk consumer behavior render truthful disclosure of transactions incentive compatible supporting a unique equilibrium robust to cream-skimming and cross-subsidizing deviations, even under Hellwig's "secret" policy assumption. In equilibrium each type demands low-risk's optimal pooling policy and high-risk supplement to full coverage at fair-price. Nonpassive consumers' belief firms are sequentially rational necessary for equilibrium; lemon equilibrium with only high-risk insured possible.

Keywords: Adverse selection; Sequential rationality; Screening; Signaling; Incentive compatibility; Insurance pooling (search for similar items in EconPapers)
JEL-codes: D82 G22 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2018-12
New Economics Papers: this item is included in nep-ias and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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