COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1346RR

Competitive Pooling: Rothschild-Stiglitz Reconsidered

Pradeep Dubey and John Geanakoplos

Revised February 2002

We build a model of competitive pooling, which incorporates adverse selection and signalling into general equilibrium. Pools are characterized by their quantity limits on contributions. Households signal their reliability by choosing which pool to join. In equilibrium, pools with lower quantity limits sell for a higher price, even though each household's deliveries are the same at all pools.

The Rothschild-Stiglitz model of insurance is included as a special case. We show that by recasting their hybrid oligopolistic-competitive story in our perfectly competitive framework, their separating equilibrium always exists (even when they say it doesn't) and is unique.

Keywords: competitive pooling, insurance, adverse selection, signalling, refined equilibrium, separating equilibrium

JEL Classification: D4, D5, D41, D52, D81, D82