Efficient Nash Equilibrium under Adverse Selection
Diasakos, Theodoros M
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This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz . We propose a simple extension of the game-theoretic structure in Hellwig  under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson .