Competitive insurance markets under adverse selection and capacity constraints

Ever since the seminal work by Rothschild and Stiglitz (Q. J, Econom. 90 (1976) 629) on competitive insurance markets under adverse selection, the problem of non-existence of equilibrium in pure strategies has received much attention in the literature. We extend the original analysis by considering firms which face capacity constraints, which might be due to limited capital, We show that under mild assumptions an equilibrium exists, where every consumer obtains his appropriate Rothschild-Stiglitz contract. (C) 2001 Elsevier Science B.V. All rights reserved.