Retrading in Competitive Equilibria with Adverse Selection

Pamela Labadie
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Pamela Labadie: George Washington University

No 838, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: Competitive equilibria in adverse selection economies with private information are generally studied in models with a market structure that has risk neutral firms, market segmentation and contract exclusivity. An alternative market structure closer to the standard Arrow-Debreu framework is studied here in which risk averse agents directly trade contingent claims and markets are not segmented by type. The result is the competitive equilibrium with anonymity, which has the properties that the exclusivity of contracts cannot be enforced, agents can enter into side markets, and markets are not segmented. The allocation results in a set of endogenous transfers and subsidies. The allocations are individually incentive compatible and, because all opportunities from retrading are exhausted in a certain sense, the allocation is also multilaterally incentive compatible.

Date: 2008
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