Survey_RS_1976

Abstract

We are able to show that not only may a competitive equilibrium not exist, but when equilibria do exist, they may have strange properties. In the insurance market, upon which we focus much of our discussion, sales offers, at least those that survive the competitive process, do not specify a price at which customers can buy all the insurance, they want, but instead consist of both a price and a quantity—a particular amount of insurance that the individual can buy at tbat price. Furthermore, if individuals were willing or able to reveal their information, everybody could be made better off. By their very being, high-risk individuals cause an externality: tbe low-risk individuals are worse off than they would be in the absence of the high-risk individuals. However, the high-risk individuals are no better off than they would be in the absence of the low-risk individuals. These points are made in the next section by analysis of a simple model of a competitive insurance market. We believe that the lessons gleaned from our highly stylized model are of general interest, and attempt to establish this by showing in Section II that our model is robust and by hinting (space constraints prevent more) in the conclusion that our analysis applies to many other situations.