Working Paper: NBER ID: w26251
Authors: Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
Abstract: We study the Rothschild-Stiglitz model of insurance markets, introducing endogenous information disclosure about insurance sales and purchases by firms and consumers. We show that a competitive equilibrium exists under unusually mild conditions, and characterize the unique equilibrium outcome. With two types of consumers the outcome is particularly simple, consisting of a pooling contract which maximizes the well-being of the low risk individual (along the zero profit pooling line) plus a supplemental (undisclosed and nonexclusive) contract that brings the high risk individual to full insurance (at his own odds). We show that this outcome is extremely robust and constrained Pareto efficient. Asymmetric equilibrium information flows with endogenous consumer disclosure are critical in supporting the equilibrium.
Keywords: No keywords provided
JEL Codes: D43; D82; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumer behavior (disclosure of information) (D18) | market outcomes (equilibrium existence) (D53) |
| endogenous information disclosure (D82) | competitive equilibrium (D41) |
| type of insurance contracts offered (G52) | types of consumers (low-risk and high-risk) (R20) |
| asymmetric information flows + consumer decisions to disclose information (D82) | market equilibrium (D53) |