POOLING AND SEPARATING EQUILIBRIA IN INSURANCE MARKETS WITH ADVERSE SELECTION AND DISTRIBUTION COSTS

In the Rothschild-Stiglitz [1976] model of a competitive insurance mar ket with adverse selection, pooling equilibria cannot exist. However i n practice, pooling contracts are frequent, notably in health insuranc e and life insurance. This is due to the fact that distribution costs are nonnegligible and increase rapidly when more contracts are offered . We modify accordingly the Rothschild-Stiglitz model by introducing s uch distribution costs. We find that, however small these costs may be , they entail possible existence of pooling equilibria. Moreover, in t hese pooling equilibria, it is the high-risk individuals who are ratio ned, in the sense that they would be willing to buy more insurance at the current premium/insurance ratio.