Efficient nash equilibrium under adverse selection

Theodoros Diasakos, Kostas Koufopoulos

    Research output: Working paper

    3 Downloads (Pure)


    This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz (QJE, 1976). We propose a simple extension of the game-theoretic structure in Hellwig (EER, 1987) under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson (ECMA, 1983).
    Original languageEnglish
    PublisherUniversity of St Andrews
    Number of pages65
    Publication statusPublished - Aug 2013

    Publication series

    NameSchool of Economics & Finance Discussion Paper 1313
    ISSN (Print)0962-4031
    ISSN (Electronic)2055-303X


    • Insurance market
    • Adverse selection
    • Incentive efficiency


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