Signalling and Default: Rothschild-Stiglitz Reconsidered

29 Pages Posted: 25 Jun 2001

See all articles by Pradeep K. Dubey

Pradeep K. Dubey

SUNY Stony Brook - Center for Game Theory in Economics

John Geanakoplos

Yale University; Santa Fe Institute

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

Dubey, Pradeep K. and Geanakoplos, John D, Signalling and Default: Rothschild-Stiglitz Reconsidered (May 2001). Available at SSRN: https://ssrn.com/abstract=274519

Pradeep K. Dubey

SUNY Stony Brook - Center for Game Theory in Economics ( email )

Stony Brook, NY 11794
United States
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John D Geanakoplos (Contact Author)

Yale University ( email )

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HOME PAGE: http://https://economics.yale.edu/people/faculty/john-geanakoplos

Santa Fe Institute ( email )

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