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A game theoretic fundation of competitive quilibria with adverse selection


Netzer, Nick; Scheuer, Florian (2014). A game theoretic fundation of competitive quilibria with adverse selection. International Economic Review, 55(2):399-422.

Abstract

We construct an extensive form game that captures competitive markets with adverse selection. It allows firms to offer any finite set of contracts, so that cross-subsidization is not ruled out. Moreover, firms can withdraw from the market after initial contract offers have been observed. We show that a subgame perfect equilibrium always exists. In fact, when withdrawal is costless, the set of equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that continue to exist for small withdrawal costs. We show that the Miyazaki–Wilson contracts are the unique robust equilibrium outcome.

Abstract

We construct an extensive form game that captures competitive markets with adverse selection. It allows firms to offer any finite set of contracts, so that cross-subsidization is not ruled out. Moreover, firms can withdraw from the market after initial contract offers have been observed. We show that a subgame perfect equilibrium always exists. In fact, when withdrawal is costless, the set of equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that continue to exist for small withdrawal costs. We show that the Miyazaki–Wilson contracts are the unique robust equilibrium outcome.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2014
Deposited On:07 Oct 2014 10:22
Last Modified:05 Apr 2016 18:24
Publisher:Wiley-Blackwell Publishing, Inc.
ISSN:0020-6598
Publisher DOI:https://doi.org/10.1111/iere.12054
Related URLs:http://www.zora.uzh.ch/69066/

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