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Title:Efficiency and equilibria in games of optimal derivative design PDF Logo
Authors:Horst, Ulrich
Moreno-Bromberg, Santiago
Issue Date:2010
Series/Report no.:SFB 649 discussion paper 2010-035
Abstract:In this paper the problem of optimal derivative design, profit maximization and risk minimization under adverse selection when multiple agencies compete for the business of a continuum of heterogenous agents is studied. In contrast with the principal-agent models that are extended within, here the presence of ties in the agents' best-response correspondences yields discontinuous payoff functions for the agencies. These discontinuities are dealt with via efficient tie-breaking rules. The main results of this paper are a proof of existence of (mixed-strategies) Nash equilibria in the case of profit-maximizing agencies, and of socially efficient allocations when the firms are risk minimizers. It is also shown that in the particular case of the entropic risk measure, there exists an efficient 'fix-mix' tie-breaking rule, in which case firms share the whole market over given proportions.
Subjects:adverse selection
Nash equilibria
Pareto optimality
risk transfer
socially efficient allocations
tie-breaking rules
JEL:C62
C72
D43
D82
G14
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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