Neutrally Optimal Mechanism under Adverse Selection (Accepted Version).pdf (558.65 kB)
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(Neutrally) Optimal Mechanism under Adverse Selection: The canonical insurance problem

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journal contribution
posted on 07.03.2019, 13:37 by TM Diasakos, K Koufopoulos
This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz (1976). We extend the three-stage game in Hellwig (1987) by allowing firms to endogenously choose whether or not to pre-commit on their contractual offers (menus). We show how this mechanism can deliver the Miyazaki–Wilson–Spence allocation as the unique perfect-Bayesian equilibrium. This allocation is the unique incentive-efficient and individually-rational maximizer of the utility of the most profitable type. In fact, given that the informed player has only two types, it is the unique core allocation and thus the unique neutral optimum in the sense of Myerson (1983).

History

Citation

GAMES AND ECONOMIC BEHAVIOR, 2018, 111, pp. 159-186 (28)

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Business

Version

AM (Accepted Manuscript)

Published in

GAMES AND ECONOMIC BEHAVIOR

Publisher

Elsevier

issn

0899-8256

eissn

1090-2473

Copyright date

2018

Publisher version

https://www.sciencedirect.com/science/article/pii/S0899825618300691?via=ihub

Notes

The file associated with this record is under embargo until 18 months after publication, in accordance with the publisher's self-archiving policy. The full text may be available through the publisher links provided above.

Language

en