Signalling and Default: Rothschild-Stiglitz Reconsidered
29 Pages Posted: 25 Jun 2001
Date Written: May 2001
Abstract
In our previous paper we built a general equilibrium model of default and punishment in which equilibrium always exists and endogenously determines asset promises, penalties, and sales constraints. In this paper we interpret the endogenous sales constraints as equilibrium signals. By specializing the default penalties and imposing an exclusivity constraint on asset sales, we obtain a perfectly competitive version of the Rothschild-Stiglitz model of insurance. In our model their separating equilibrium always exists even when they say it doesn't.
Keywords: Default, Incomplete Markets, Adverse Selection, Moral Hazard, Equilibrium Refinement, Signalling, Endogenous Assets
JEL Classification: D4, D5, D41, D52, D81, D81
Suggested Citation: Suggested Citation
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