‘Pooling equilibrium’ occurs when all risk types purchase the same insurance policy. 2. ‘Separating equilibrium’ Each risk category (H,L) purchases a unique policy.
How equilibrium is achieved in an insurance market?
In a competitive insurance market, equilibrium is a set of contracts such that I no contract in the equilibrium set makes negative expected profits when customers choose contracts to maximize expected utility; and (ii) no contract outside the equilibrium set will make a nonnegative expected profit if offered.
Under what conditions a separating equilibrium may also not exist?
When the distortion caused by self-selection becomes too great, a pooling contract (bought by high and low risk persons) is always chosen, and the “separating” equilibrium cannot be maintained. There is no competitive equilibrium in this scenario.
What is Rothschild Stiglitz model?
ABSTRACT. Rothschild and Stiglitz (1976) demonstrated that in competitive insurance markets with asymmetric knowledge, pooling contracts cannot exist in equilibrium, businesses make zero profit, and equilibrium does not exist in some cases.
What is pooling equilibrium in game theory?
In game theory, a pooling equilibrium is the result of a signaling game.
In a signaling game, players use “signals” to communicate with other players. Signaling activities are chosen based on information that is kept confidential (not known by other players in the game). These behaviors do not expose a player’s “type” to other players in the game, but they do influence how other players adopt strategies. Because they have no motivation to differentiate themselves, all types of a given sender will send the same signal, some expressing their genuine type and others correctly copying the type of others. As a result, the receiver acts as if no information/message has been received, maximizing his/her utility based on his/her prior opinion.
What is Bayesian Nash equilibrium?
A strategy profile is a Nash equilibrium in a non-Bayesian game if every strategy in the profile is a best response to every other strategy in the profile; that is, there is no strategy that a player could play that would produce a higher payout given all of the other players’ strategies.
A Bayesian game has a similar concept, with the difference that each player’s strategy maximizes his expected payoff based on his beliefs about the state of nature. Prior probabilities are used to condition a player’s views about the state of nature.
What is asymmetry information?
When one side to an economic transaction has more tangible knowledge than the other, asymmetric information, often known as “information failure,” arises. This occurs most often when the seller of a good or service has more knowledge than the buyer; however, the opposite dynamic can also occur. Information asymmetries are present in almost all economic transactions.