Characterization, Existence, and Pareto Optimality in Markets with Asymmetric Information and Endogenous and Asymmetric Disclosures: Basic Analytics of Revisiting Rothschild-Stiglitz

Joseph Stiglitz, Jungyoll Yun and Andrew Kosenko

No 26251, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the Rothschild-Stiglitz model of insurance markets, introducing endogenous information disclosure about insurance sales and purchases by firms and consumers. We show that a competitive equilibrium exists under unusually mild conditions, and characterize the unique equilibrium outcome. With two types of consumers the outcome is particularly simple, consisting of a pooling contract which maximizes the well-being of the low risk individual (along the zero profit pooling line) plus a supplemental (undisclosed and nonexclusive) contract that brings the high risk individual to full insurance (at his own odds). We show that this outcome is extremely robust and constrained Pareto efficient. Asymmetric equilibrium information flows with endogenous consumer disclosure are critical in supporting the equilibrium.

JEL-codes: D43 D82 D86 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-com, nep-cta, nep-ias and nep-mic
Note: TWP
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Citations: View citations in EconPapers (1)

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