Diasakos, Theodoros orcid.org/0000-0001-7364-1472 and Koufopoulos, Konstantinos (2018) (Neutrally) Optimal Mechanism under Adverse Selection:The canonical insurance problem. Games and Economic Behaviour. 159–186. ISSN 0899-8256
Abstract
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).
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | ©2018 Elsevier Inc. All rights reserved. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details. |
Keywords: | Insurance market,Adverse selection,Interim incentive efficiency,Neutral optimum |
Dates: |
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Institution: | The University of York |
Academic Units: | The University of York > Faculty of Social Sciences (York) > Economics and Related Studies (York) |
Depositing User: | Pure (York) |
Date Deposited: | 21 Aug 2019 12:50 |
Last Modified: | 08 Feb 2025 00:34 |
Published Version: | https://doi.org/10.1016/j.geb.2018.04.007 |
Status: | Published |
Refereed: | Yes |
Identification Number: | 10.1016/j.geb.2018.04.007 |
Related URLs: | |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:149827 |
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Description: Neutrally Optimal Mechanism under Adverse Selection (Accepted Version)