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- Title
Adverse Selection When Loss Severities Differ: First-Best and Costly Equilibria.
- Authors
Doherty, Neil A.; Hong Joo Jung
- Abstract
With information asymmetry between contracting parties. adverse selection may result. A separation may be achieved if low-risk types can signal their identity--for example, by selecting from a menu of price-quantity contracts. In such models, signaling is costly and solutions are, at best, second best These models characterize risk types by differences, in the probability, rather than in severity, of the costs they impose. However, when severity differences also are considered, first- best solutions become feasible. We identify the circumstances in which costly separating equilibria prevail and those in which full-information equilibria can be attained.
- Subjects
ECONOMIC equilibrium; RISK management in business; RISK assessment; EQUILIBRIUM; INSURANCE; ECONOMIC stabilization
- Publication
GENEVA Papers on Risk & Insurance - Theory, 1993, Vol 18, Issue 2, p173
- ISSN
0926-4957
- Publication type
Article
- DOI
10.1007/BF01111468