Competitive Pooling: Rothschild-Stiglitz Reconsidered
We build a model of competitive pooling, which incorporates adverse selection and signalling into general equilibrium. Pools are characterized by their quantity limits on contributions. Households signal their reliability by choosing which pool to join. In equilibrium, pools with lower quantity limits sell for a higher price, even though each household’s deliveries are the same at all pools. The Rothschild-Stiglitz model of insurance is included as a special case. We show that by recasting their hybrid oligopolistic-competitive story into our perfectly competitive framework, their separating equilibrium always exists (even when they say it doesn’t) and is unique.
Dubey, Pradeep and Geanakoplos, John, "Competitive Pooling: Rothschild-Stiglitz Reconsidered" (2001). Cowles Foundation Discussion Papers. 1609.