Document Type
Discussion Paper
Publication Date
1-1-2019
CFDP Number
2159
CFDP Pages
37
Journal of Economic Literature (JEL) Code(s)
D82, G22
Abstract
I model financial markets that structure decision-making into discrete points separating contract offers, applications, and acceptance/denial decisions. Endogenous beliefs about applicants’ risk types emerge as the institutional process extracts private information allowing uninformed firms to infer risk qualities by comparing applications of many consumers. Endogenous beliefs and low-risk consumer behavior render truthful disclosure of transactions incentive compatible supporting a unique equilibrium robust to cream-skimming and cross-subsidizing deviations, even under Hellwig’s “secret” policy assumption. In equilibrium each type demands low-risk’s optimal pooling policy and high-risk supplement to full coverage at fair-price. Nonpassive consumers’ belief firms are sequentially rational necessary for equilibrium; lemon equilibrium with only high-risk insured possible.
Recommended Citation
Jaynes, Gerald David, "Endogenous Beliefs and Institutional Structure in Competitive Equilibrium with Adverse Selection" (2019). Cowles Foundation Discussion Papers. 105.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/105