TY - JOUR

T1 - A walrasian theory of markets with adverse selection

AU - Gale, Douglas

N1 - Funding Information:
The final step is to show separation. Suppose to the contrary that pooling occurs at some point mEM. Then either p,~ or p,g is discontinuous from the right at m' -+ m. This implies that po is discontinuous from the right as m' -+ m. But for any m'> m, p,°(m',') is better than p,°(m, .) in the sense of first-order stochastic dominance. Consequently the discontinuity in po implies that some type of buyer or some type of seller who has chosen contract m would be better off at m', contradicting the fact that eO is an equilibrium. II Acknowledgement. An early version of this paper was presented at the University of Pennsylvania and at the Midwest Mathematical Economics Meetings in 1987. The seminar participants made helpful comments on that draft. I am greatly indebted to John Moore and three anonymous referees who made numerous, thoughtful comments and greatly improved the exposition of the paper. The financial support of the NSF under grants SES 8646351 and SES 8720589 is gratefully acknowledged.
Copyright:
Copyright 2016 Elsevier B.V., All rights reserved.

PY - 1992/2

Y1 - 1992/2

N2 - The paper describes a Walrasian theory of markets with adverse selection and shows how refinements of equilibrium can be used to characterize uniquely the equilibrium outcome. Equilibrium exists under standard conditions. It is shown that, under certain conditions, a stable set exists and is contained in a connected set of equilibria. For generic models there exists a stable outcome, that is, all the equilibria in the stable set have the same outcome. These ideas are applied to markets with one-sided and two-sided uncertainty. Under standard monotonicity conditions, it is shown that the stable outcome is separating and implies a particular pattern of matches of buyers and sellers.

AB - The paper describes a Walrasian theory of markets with adverse selection and shows how refinements of equilibrium can be used to characterize uniquely the equilibrium outcome. Equilibrium exists under standard conditions. It is shown that, under certain conditions, a stable set exists and is contained in a connected set of equilibria. For generic models there exists a stable outcome, that is, all the equilibria in the stable set have the same outcome. These ideas are applied to markets with one-sided and two-sided uncertainty. Under standard monotonicity conditions, it is shown that the stable outcome is separating and implies a particular pattern of matches of buyers and sellers.

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U2 - 10.2307/2297953

DO - 10.2307/2297953

M3 - Article

AN - SCOPUS:84963043376

VL - 59

SP - 229

EP - 255

JO - Review of Economic Studies

JF - Review of Economic Studies

SN - 0034-6527

IS - 2

ER -