Abstract
We model economies of adverse selection as Arrow-Debreu economies. In the spirit of Prescott and Townsend (Econometrica 52(1), 21-45, 1984a), we identify the consumption set of the individuals with the set of lotteries over net transfers. Thus, prices are linear in lotteries, but they may be non linear in commodity bundles. First, we study a weak equilibrium notion by viewing the economy of adverse selection as a pure exchange economy. The weak equilibrium set is non empty, but some of the allocations may be inefficient, and the equilibria indeterminate. Second, following Prescott and Townsend (Econometrica 52(1), 21-45, 1984a), we introduce an intermediary (firm) supplying feasible and incentive compatible measures. Equilibria are constrained efficient, but the equilibrium set is empty for an open set of economies containing the Rothschild and Stiglitz insurance economies.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1-29 |
| Number of pages | 29 |
| Journal | Economic Theory |
| Volume | 37 |
| Issue number | 1 |
| DOIs | |
| State | Published - Oct 2008 |
Bibliographical note
Funding Information:We thank Alberto Bisin, John Geanakoplos, Pietro Gottardi, Ed Prescott, Alberto Bennardo for discussions on this topic. The comments of an anonymous referee are kindly acknowledged. The research of Aldo Rustichini was supported by the NSF grant NSF/SES-0136556. Paolo Siconolfi acknowledges the support of the Graduate School of Business at Columbia University.
Funding Information:
The research of A. Rustichini was supported by the NSF grant NSF/SES-0136556.
Keywords
- Adverse selection
- Asymmetric information
- General equilibrium
- Lotteries