Risk Management Question

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

Q1: Why the most important conclusions of economic theory are not robust to considerations of imperfect information? (5 marks).

Q2: Describe how the insurance market works. Explain why this market may have no equilibrium. (10 marks).

Q3: 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).

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