Michael Rothschild and Joseph Stiglitz, “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information”, The Quarterly Journal of Economics, Vol. 90, No. 4 (Nov. 1976), pp. 629-649. Published by: The MIT Press.
With reference to Rothschild & Stiglitz paper, answer the following questions
1- Why the most important conclusions of economic theory are not robust to considerations of imperfect information? (5 marks).
2- Describe how the insurance market works. Explain why this market may have no equilibrium. (5 marks).
3- Explain analytically how the separating equilibrium described by Rothschild and Stiglitz may not be Pareto optimal even relative to the information that is available. (5 marks).