An equilibrium in which agents with differing characteristics choose the same action. For example, in an insurance market a pooling equilibrium involves high-risk and low-risk agents choosing the same insurance contract.
What is separating equilibrium in insurance?
An equilibrium in which agents with different characteristics choose different actions. For example, in an insurance market high-risk agents and low-risk agents will choose different insurance contracts in a separating equilibrium.
How equilibrium is achieved in an insurance market?
Equilibrium in a competitive insurance market is a set of con- tracts such that, when customers choose contracts to maximize ex- pected utility, (i) no contract in the equilibrium set makes negative expected profits; and (ii) there is no contract outside the equilibrium set that, if offered, will make a nonnegative
Under what conditions a separating equilibrium may also not exist?
When the distortion associated with self-selection is too large, there is always a pooling contract (purchased by high and low risk individuals) that will be preferred, in which case the “separating” equilibrium cannot be sustained. In this case, there exists no competitive equilibrium. insurance.
What is pooling equilibrium in economics?
An equilibrium in which agents with differing characteristics choose the same action. For example, in an insurance market a pooling equilibrium involves high-risk and low-risk agents choosing the same insurance contract. See also separating equilibrium.
What is pooling equilibrium game?
A pooling equilibrium in game theory is an equilibria result of a signaling game. In a signaling game, players send actions called “signals” to other players in the game. These actions do not reveal a player’s “type” to other players in the game, and other players will choose strategies accordingly.
How do insurance companies protect themselves from adverse selection?
Insurance companies have three options for protecting against adverse selection, including accurately identifying risk factors, having a system for verifying information, and placing caps on coverage.
What is the Rothschild Stiglitz model?
The Rothschild-Stiglitz model predicts that people who own life insurance should have fewer unobserved traits (that is, unobserved by insurance com- panies) that lead to a higher risk of death when compared against people with the same level of income but who do not own life insurance. FALSE.
What is adverse selection Econ?
Key Takeaways. Adverse selection is when sellers have information that buyers do not have, or vice versa, about some aspect of product quality. It is thus the tendency of those in dangerous jobs or high-risk lifestyles to purchase life or disability insurance where chances are greater they will collect on it.