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A GAME THEORETIC FOUNDATION OF COMPETITIVE EQUILIBRIA WITH ADVERSE SELECTION
Author(s) -
Netzer Nick,
Scheuer Florian
Publication year - 2014
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12054
Subject(s) - adverse selection , outcome (game theory) , subgame perfect equilibrium , economics , mathematical economics , set (abstract data type) , construct (python library) , microeconomics , equilibrium selection , foundation (evidence) , subgame , extensive form game , selection (genetic algorithm) , subsidy , markov perfect equilibrium , game theory , repeated game , nash equilibrium , computer science , market economy , archaeology , artificial intelligence , history , programming language
We construct an extensive form game that captures competitive markets with adverse selection. It allows firms to offer any finite set of contracts, so that cross‐subsidization is not ruled out. Moreover, firms can withdraw from the market after initial contract offers have been observed. We show that a subgame perfect equilibrium always exists. In fact, when withdrawal is costless, the set of equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that continue to exist for small withdrawal costs. We show that the Miyazaki–Wilson contracts are the unique robust equilibrium outcome.