Refinements and incentive efficiency in Walrasian models of insurance economies

Abstract

The literature on Walrasian markets in large economies with adverse selection has used various equilibrium refinements, but has obtained no general incentive efficiency of equilibrium, namely when cross-subsidies are needed for efficiency. We show that the same refined equilibria may also be incentive inefficient even when general mechanisms that allow for such cross-subsidies are priced and can be traded. In the process, we also prove existence of some type of forward induction equilibria in this context.