Abstract
We develop an equilibrium concept in the Debreu (Proc Natl Acad Sci USA 40(7):588–592, 1954) theory of value tradition for a class of adverse selection economies which includes the Spence (Q J Econ 87(3):355–374, 1973) signaling and Rothschild–Stiglitz (Q J Econ 90(4):629–649, 1976) insurance environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.
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Notes
The no-profit condition is related to Ostroy’s (1980) no-surplus condition.
Debreu and Scarf (1963) show that with convexity, under replication, in the limit the set of core allocations is the set of valuation equilibria. Mas-Colell (1982) has studied further the relationship between perfect competition and the core. Others addressing the adverse selection insurance problem have developed equilibrium concepts which lead to existence of equilibria include Wilson (1968, 1979), and Dubey and Geanakoplos (2002).
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We would like to thank an anonymous referee, Rob Shimer, and Manual Amador for their useful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
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Blandin, A., Boyd, J.H. & Prescott, E.C. Equilibrium with mutual organizations in adverse selection economies. Econ Theory 62, 3–13 (2016). https://doi.org/10.1007/s00199-015-0918-3
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DOI: https://doi.org/10.1007/s00199-015-0918-3