Open AccessCharacterization and uniqueness of equilibrium in competitive insurance
Author(s) -
Farinha Luz Vitor
Publication year - 2017
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te2166
Subject(s) - uniqueness , mathematical economics , characterization (materials science) , economics , competitive equilibrium , rothschild , comparative statics , symmetric equilibrium , distribution (mathematics) , microeconomics , equilibrium selection , mathematics , repeated game , game theory , mathematical analysis , materials science , nanotechnology , archaeology , history
This paper provides a complete characterization of equilibria in a game‐theoretic version of Rothschild and Stiglitz's (1976) model of competitive insurance. I allow for stochastic contract offers by insurance firms and show that a unique symmetric equilibrium always exists. Exact conditions under which the equilibrium involves mixed strategies are provided. The mixed equilibrium features (i) cross‐subsidization across risk levels, (ii) dependence of offers on the risk distribution, and (iii) price dispersion generated by firm randomization over offers.