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Working Papers

July 1994, No. 94-9 (Revised Sep. 1995)

The Coalition-Proof Core in Adverse Selection Economies

Jeffrey M. Lacker and John A. Weinberg

We reexamine the core in the adverse selection insurance economy first studied by Rothschild and Stiglitz (1976). Defining blocking in a way that takes private information into account, the core is sometimes empty. We define the coalition-proof core as the set of allocations which are blocked only by allocations which are themselves blocked by coalition- proof allocations. This definition is closely related to Coalition Proof Nash Equilibrium, introduced by Bernheim, Peleg and Whinston (1987). We prove that the coalition-proof core consists of the Miyazaki allocation--the Pareto-optimal allocation most preferred by low-risk agents. The coalition-proof core is always nonempty in this economy and has attractive continuity properties. Cross-subsidization can occur in the coalition-proof core.

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