This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [24]. We propose a simple extension of the game-theoretic structure in Hellwig [13] under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson [20].

Is there a rational component in the decision to commit suicide? Economists have been trying to shed light on this question by studying whether suicide rates are related to contemporaneous conditions. This paper goes one step further: we test whether suicides are linked to forward-looking behavior. In Italy, collective sentence reductions (pardons) often lead to massive releases of prisoners. More importantly, they are usually preceded by prolonged parliamentary activity (legislative proposals, discussion, voting, etc.) that inmates seem to follow closely. We use the legislative proposals for collective pardons to measure changes in the inmates' expectations about the length of their sentences, and find that suicide rates tend to be significantly lower when pardons are proposed in congress. This suggests that, amongst inmates in Italian prisons, the average decision to commit suicide responds to changes in current expectations about future conditions. At least partially, therefore, the decision seems rationalizable.

This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [35]. We extend the three-stage game in Hellwig [19] by allowing firms to endogenously choose whether or not to pre-commit on their contractual offers (menus). We show how this mechanism can deliver the Miyazaki-Wilson-Spence allocation as the unique perfect-Bayesian equilibrium. This allocation is the unique incentive-efficient and individually-rational maximizer of the utility of the most profitable type. In fact, given that the informed player has only two types, it is the unique core allocation and thus the unique neutral optimum in the sense of Myerson [29].

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