Signalling and Default: Rothschild-Stiglitz Reconsidered

Authors: 
Pradeep Dubey & John Geanakoplos
Abstract: 

In our previous paper we built a general equilibrium model of default and punishment in which equilibrium always exists and endogenously determines asset promises, penalties, and sales constraints. In this paper we interpret the endogenous sales constraints as equilibrium signals. By specializing the default penalties and imposing an exclusivity constraint on asset sales, we obtain a perfectly competitive version of the Rothschild-Stiglitz model of insurance. In our model their separating equilibrium always exists even when they say it doesn't.

Date: 
May, 2001
Published in: 
The Quarterly Journal of Economics 117 (2002), 1529-1570.
Number: 
242