Participation Constraints in Discontinuous Adverse Selection Models

Participation Constraints in Discontinuous Adverse Selection Models
Author: David Martimort
Publisher:
Total Pages: 42
Release: 2020
Genre: Control theory
ISBN:

We present a set of necessary and sufficient conditions for a class of optimal control problems with pure state constraints for which the objective function is linear in the state variable but the objective function is only required to be upper semi-continuous in the control variable. We apply those conditions to a number of economic environments in contract theory where discontinuities in objectives prevail. Examples of applications include nonlinear pricing of digital goods, nonlinear pricing under competitive threat, and common agency models of regulation.

Price and Quality Competition Under Adverse Selection

Price and Quality Competition Under Adverse Selection
Author: Gary Biglaiser
Publisher:
Total Pages: 0
Release: 2003
Genre:
ISBN:

Firms compete with prices and qualities in markets where consumers have heterogeneous preferences and cost characteristics. Consumers demand two goods, which can be supplied jointly or separately by firms. We consider two strategy regimes for firms: uniform price-quality pairs, and screening price-quality menus. For each regime, we compare the equilibria under integration (each firm supplying both goods) and separation (each firm supplying one good). Integrating and separating markets change quality, efficiency, and welfare. The theory illustrates phenomena such as the carveout of mental health and substance abuse coverage from general health insurance, and creaming for low-cost students in locales with school choices.

Perfect Competition in Markets with Adverse Selection

Perfect Competition in Markets with Adverse Selection
Author: Eduardo M. Azevedo
Publisher:
Total Pages: 40
Release: 2017
Genre:
ISBN:

Adverse selection is an important problem in many markets. Governments respond to it with complex regulations: mandates, community rating, subsidies, risk adjustment, and regulation of contract characteristics. This paper proposes a perfectly competitive model of a market with adverse selection. Prices are determined by zero-profit conditions, and the set of traded contracts is determined by free entry. Crucially for applications, contract characteristics are endogenously determined, consumers may have multiple dimensions of private information, and an equilibrium always exists. Equilibrium corresponds to the limit of a differentiated products Bertrand game.We apply the model to show that mandates can increase efficiency but have unintended consequences. An insurance mandate can increase adverse selection on the intensive margin and lead some consumers to purchase less coverage. Optimal regulation addresses adverse selection on both the extensive and the intensive margins, can be described by a sufficient statistics formula, and includes elements that are commonly used in practice.

Stress Testing Structural Models of Unobserved Heterogeneity

Stress Testing Structural Models of Unobserved Heterogeneity
Author: Aaron L. Bodoh-Creed
Publisher:
Total Pages: 0
Release: 2023
Genre:
ISBN:

In this paper, we provide a suite of tools for empirical market design, including optimal nonlinear pricing in intensive-margin consumer demand, as well as a broad class of related adverse-selection models. Despite significant data limitations, we are able to derive informative bounds on demand under counterfactual price changes. These bounds arise because empirically plausible DGPs must respect the Law of Demand and the observed shift(s) in aggregate demand resulting from a known exogenous price change(s). These bounds facilitate robust policy prescriptions using rich, internal data sources similar to those available in many real-world applications. Our partial identification approach enables viable nonlinear pricing design while achieving robustness against worst-case deviations from baseline model assumptions. As a side benefit, our identification results also provide useful, novel insights into optimal experimental design for pricing RCTs.

On Competitive Nonlinear Pricing

On Competitive Nonlinear Pricing
Author: Andrea Attardi
Publisher:
Total Pages: 46
Release: 2015
Genre: Assets (Accounting)
ISBN:

Many financial markets rely on a discriminatory limit-order book to balance supply and demand. We study these markets in a static model in which uninformed market makers compete in nonlinear tariffs to trade with an informed insider, as in Glosten (1994), Biais, Martimort, and Rochet (2000), and Back and Baruch (2013). We analyze the case where tariffs are unconstrained and the case where tariffs are restricted to be convex. In both cases, we show that pure-strategy equilibrium tariffs must be linear and, moreover, that such equilibria only exist under exceptional circumstances. These results cast doubt on the stability of even well-organized financial markets.

The Economic Theory of Annuities

The Economic Theory of Annuities
Author: Eytan Sheshinski
Publisher: Princeton University Press
Total Pages: 184
Release: 2021-05-11
Genre: Business & Economics
ISBN: 1400829429

Annuities are financial products that guarantee the holder a fixed return so long as the holder remains alive, thereby providing insurance against lifetime uncertainty. The terms of these contracts depend on the information available to insurance firms. Unlike age and gender, information about individual survival probabilities cannot be readily ascertained. This asymmetric information causes market inefficiencies, such as adverse selection. Groundbreaking in its scope, The Economic Theory of Annuities offers readers a theoretical analysis of the functioning of private annuity markets. Starting with a general analysis of survival functions, stochastic dominance, and characterization of changes in longevity, Eytan Sheshinski derives the demand for annuities using a model of individuals who jointly choose their lifetime consumption and retirement age. The relation between life insurance and annuities that have a bequest option is examined and "annuity options" are proposed as a response to the lack of secondary markets. This book also investigates the macroeconomic policy implications of annuities and changes in longevity on aggregate savings. Sheshinski utilizes statistical population theory to shed light on the debate of whether the surge in savings and growth in Asia and other countries can be attributed to higher longevity of the population and whether this surge is durable. This book shows how understanding annuities becomes essential as governments that grapple with insolvency of public social security systems place greater emphasis on individual savings accounts.

Does Competitive Pricing Cause Market Breakdown Under Extreme Adverse Selection?

Does Competitive Pricing Cause Market Breakdown Under Extreme Adverse Selection?
Author: George J. Mailath
Publisher:
Total Pages: 0
Release: 2007
Genre:
ISBN:

We study market breakdown in a finance context under extreme adverse selection with and without competitive pricing. Adverse selection is extreme if for any price there are informed agent types with whom uninformed agents prefer not to trade. Market breakdown occurs when no trade is the only equilibrium outcome. We present a necessary and sufficient condition for market breakdown. If the condition holds, then trade is not viable. If the condition fails, then trade can occur under competitive pricing. There are environments in which the condition holds and others in which it fails.