Andrea Attar (Toulouse School of Economics and Università di Roma Tor Vergata)
November 21 @ 12:00
“Entry-Proofness and Market Breakdown under Adverse Selection”
We propose a unified perspective on entry-proofness in markets subject to adverse selection. We first provide a necessary and sufficient condition for entry to be unprofitable under adverse selection; namely, that no buyer type should be willing to trade at a price above the expected unit cost of serving the types who are at least as eager to trade than her. We next consider active markets. Following the approach initiated by Rothschild and Stiglitz (1976), we focus on entry-proof market tariffs. In contrast with Rothschild and Stiglitz (1976), we consider situations in which buyers cannot be prevented from trading with more than one seller. We fully characterize the unique market tariff preventing profitable entry by a seller whose offers complement the tariff. We argue that estimates of upper-tail conditional expectations of unit costs are a key variable for tests of adverse
selection, and we outline such a test in nonexclusive insurance markets.