Models of Selection Markets

Abstract

Selection markets describe markets in which people strategically ``select'' into certain options based on knowledge only they possess, and in doing so may communicate some of that knowledge. Examples include sick people buying more comprehensive health insurance contracts, talented students choosing more challenging programs, and high quality goods producers offering longer warranties. These markets tend to be inefficient—sometimes to the point of total collapse. The theory of selection markets can help to diagnose issues and offer policy solutions. This thesis analyzes three theoretical problems in the theory of selection markets. The first part is a technical contribution connecting the recent Azevedo-Gottlieb model to the older reactive equilibrium model. The second part studies insurance markets with a fixed cost of providing contracts, and gives a necessary and sufficient condition under which the market will collapse. The third provides a framework for simulating selection markets with choice frictions, and constructs a model within this framework to study the ambiguous effect of rational inattention on insurance market inefficiency.