Efficient competitive equilibria with adverse selection

Arbeitspapier

Do Walrasian markets function orderly in the presence of adverse selection? In particular, is their outcome efficient? This paper addresses these questions in the context of a Rothschild and Stiglitz insurance economy. We identify an externality associated with the presence of adverse selection as a special form of consumption externality. Consequently, we show that while competitive equilibria always exist, they are not typically incentive efficient. However, as markets for pollution rights can internalize environmental externalities, markets for consumption rights can be designed so as to internalize the consumption externality due to adverse selection. With such markets competitive equilibria exist and are always incentive efficient. Moreover, any incentive efficient allocation can be decentralized as a competitive equilibrium.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 1504

Classification and Topics

• Classification: Wirtschaft ; General Equilibrium and Disequilibrium: General ; Insurance; Insurance Companies; Actuarial Studies ; Externalities ; Asymmetric and Private Information; Mechanism Design
• Subject: Adverse Selection ; Konsuminterdependenz ; Versicherungsökonomik ; Allgemeines Gleichgewicht ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bisin, Alberto ; Gottardi, Piero
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/18968
• Last update: 10.03.2025, 11:43 AM CET