Efficiently Regulated Competition in Insurance Economies with Adverse Selection
نویسنده
چکیده
In insurance economies with a continuum of agents and adverse selection, it is shown that incentive-constrained Pareto efficient allocations correspond to regulated competitive (or compensated competitive) equilibria in markets with non-linear pricing for options to buy insurance contracts. These options make the incentive constraints self-enforcing. Efficiency is achieved through a “universal service” requirement allowing only new contracts or blocking coalitions that benefit all potential types of each agent. This regulation prevents “cream skimming” intended to exclude high-risk agents. Under suitable assumptions, regulated equilibria are shown to exist and be characterized as “regulated core” allocations.
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