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Working Papers (2016), ESSEC Business School

A More General Definition of Equilibrium in Markets with Adverse Selection

I provide a general definition of equilibrium in markets with adverse selection. An equilibrium is defined as a menu of contracts that makes non-negative aggregate profits such that there exists no other menu that includes it as a subset and makes strictly positive aggregate profits. I show that every efficient menu of contracts is also an equilibrium menu of contracts. Furthermore, I characterise a general sufficient condition under which every equilibrium menu of contracts is efficient, restoring that way the First Fundamental Theorem of Welfare Economics. I provide two possible interpretations for this new definition.

DOSIS, A. (2016). A More General Definition of Equilibrium in Markets with Adverse Selection. ESSEC Business School.