Paper #917

Title:

On Rothschild-Stiglitz as competitive pooling

Author:

Alberto Martin

Date:

August 2003 (Revised: January 2006)

Abstract:

Dubey and Geanakoplos [2002] have developed a theory of competitive pooling, which incorporates adverse selection and signaling into general equilibrium. By recasting the Rothschild-Stiglitz model of insurance in this framework, they find that a separating equilibrium always exists and is unique. We prove that their uniqueness result is not a consequence of the framework, but rather of their definition of refined equilibria. When other types of perturbations are used, the model allows for many pooling allocations to be supported as such: in particular, this is the case for pooling allocations that Pareto dominate the separating equilibrium.

Keywords:

Competitive pooling, insurance, adverse selection, signalling, refined equilibrium, separating equilibrium

JEL codes:

D4, D5, D41, D52, D81, D82

Area of Research:

Macroeconomics and International Economics

Published in:

Economic Theory, 2007, vol. 31, issue 2, pg. 371-386

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