Imperial College London
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Dr Andre Veiga

Business School

Assistant Professor of Economics
 
 
 
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Contact

 

+44 (0)20 7594 7957a.veiga Website

 
 
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Location

 

CAGB 484Business School BuildingSouth Kensington Campus

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Summary

 

Publications

Citation

BibTex format

@article{Veiga:2021:10.1016/j.jet.2021.105198,
author = {Veiga, A and Levy, Y},
doi = {10.1016/j.jet.2021.105198},
journal = {Journal of Economic Theory},
pages = {1--36},
title = {Competitive insurance markets with unbounded cost},
url = {http://dx.doi.org/10.1016/j.jet.2021.105198},
volume = {192},
year = {2021}
}
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RIS format (EndNote, RefMan)

TY  - JOUR
AB  - Azevedo and Gottlieb (2017) (AG) define a notion of equilibrium that always exists in the Rothschild and Stiglitz (1976) (RS) model of competitive insurance markets, provided costs are bounded. However, equilibrium predictions are fragile: introducing an infinitesimal mass of high-cost individuals discretely increases all prices and reduces coverage for all individuals. We study sensitivity w.r.t. cost bounds by considering sequences of economies with increasing upper bounds of cost, and determining whether their equilibria converge. We present sufficient conditions under which AG equilibrium exists when cost is unbounded. For simple insurance markets, we derive a necessary and sufficient condition for existence: surplus from insurance increases faster than linearly with expected cost. This condition is empirically common. If the condition fails, a higher bound on cost results in market unraveling: all prices diverge and, in the limit, an AG equilibrium does not exist. We use these results to show that the equilibrium for an insurance market with an unbounded continuum of types is characterized by a simple differential equation. We also provide examples of non-existence for a (single-product) market for lemons with unbounded cost.
AU  - Veiga,A
AU  - Levy,Y
DO  - 10.1016/j.jet.2021.105198
EP  - 36
PY  - 2021///
SN  - 0022-0531
SP  - 1
TI  - Competitive insurance markets with unbounded cost
T2  - Journal of Economic Theory
UR  - http://dx.doi.org/10.1016/j.jet.2021.105198
UR  - https://www.sciencedirect.com/science/article/pii/S0022053121000156?via%3Dihub
UR  - http://hdl.handle.net/10044/1/85843
VL  - 192
ER  -
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