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Title:Negative externalities and equilibrium existence in competitive markets with adverse selection PDF Logo
Authors:von Siemens, Ferdinand
Kosfeld, Michael
Issue Date:2009
Series/Report no.:IZA discussion papers 4125
Abstract:Rothschild and Stiglitz (1976) show that there need not exist a competitive equilibrium in markets with adverse selection. Building on their framework we demonstrate that externalities between agents - an agent's utility upon accepting a contract depends on the average type attracted by the respective principal - can solve the equilibrium existence problem, even when the size of the externalities is arbitrarily small. Our result highlights the degree of control a principal has over the attractiveness of his contracts as an important feature for equilibrium existence, thereby offering a new perspective on existing theories of competition in markets with adverse selection.
Subjects:Asymmetric information
competition
adverse selection
externality
JEL:D82
D86
Persistent Identifier of the first edition:urn:nbn:de:101:1-20090513220
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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