Working Paper 717

Equilibrium with Mutual Organizations in Adverse Selection Economies

Adam Blandin
John H. Boyd
Edward C. Prescott | Senior Monetary Advisor

Revised September 1, 2015

We develop an equilibrium concept in the Debreu (1954) theory of value tradition for a class of adverse selection economies which includes the Spence (1973) signaling and Rothschild-Stiglitz (1976) insurance environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.

Published In: Economic Theory (Vol. 62, No. 1, June 2016, pp. 3-13)

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