Please use this identifier to cite or link to this item: http://hdl.handle.net/1893/27633
Appears in Collections:Economics Journal Articles
Peer Review Status: Refereed
Title: (Neutrally) Optimal Mechanism under Adverse Selection: The canonical insurance problem
Author(s): Diasakos, Theodoros M
Koufopoulos, Kostas
Contact Email: theodoros.diasakos@stir.ac.uk
Keywords: Economics and Econometrics
Finance
Issue Date: 30-Sep-2018
Citation: Diasakos TM & Koufopoulos K (2018) (Neutrally) Optimal Mechanism under Adverse Selection: The canonical insurance problem. Games and Economic Behavior, 111, pp. 159-186. https://doi.org/10.1016/j.geb.2018.04.007
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).
DOI Link: 10.1016/j.geb.2018.04.007
Rights: This item has been embargoed for a period. During the embargo please use the Request a Copy feature at the foot of the Repository record to request a copy directly from the author. You can only request a copy if you wish to use this work for your own research or private study. Accepted refereed manuscript of: Diasakos TM & Koufopoulos K (2018) (Neutrally) Optimal Mechanism under Adverse Selection: The canonical insurance problem, Games and Economic Behavior, 111, pp. 159-186. DOI: 10.1016/j.geb.2018.04.007 © 2018, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/

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