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INCENTIVE EFFICIENT PRICE SYSTEMS IN LARGE INSURANCE ECONOMIES WITH ADVERSE SELECTION
Author(s) -
Citanna Alessandro,
Siconolfi Paolo
Publication year - 2016
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.12184
Subject(s) - adverse selection , incentive , lottery , outcome (game theory) , economics , microeconomics , budget constraint , constraint (computer aided design) , market clearing , equilibrium selection , general equilibrium theory , game theory , repeated game , mechanical engineering , engineering
We decentralize incentive efficient allocations in large adverse selection economies by introducing a competitive market for mechanisms, that is, for menus of contracts. Facing a budget constraint, informed individuals purchase (lottery) tickets to enter mechanisms, whereas firms sell tickets and supply slots at mechanisms at given prices. Beyond optimization, market clearing, and rational expectations, an equilibrium requires that firms cannot favorably change, or cut, prices. An equilibrium exists and is incentive efficient. An equilibrium can be computed as the solution to a programming problem that selects the incentive efficient outcome preferred by the highest type within an appropriately defined set. For two‐types economies, this is the only equilibrium outcome.