Three economic environments are reviewed, and in each organizations play an essential role. For an adverse selection insurance economy, we find that when mutual insurance arrangements are permitted an equilibrium necessarily exists and is optimal. This example, and the two others, illustrate the problems that may result from imposing organizational structure on an environment rather than permitting the structure to be determined endogenously.
This paper studies an environment in which the investment opportunities of agents are private information and shows that financial intermediaries arise endogenously within that environment. It establishes that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors’ private information core allocations. These intermediaries, which are coalitions of agents, exhibit the following characteristics in equilibrium: they borrow from and lend to large groups of agents; they produce information about investment projects; and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers.
We develop an equilibrium concept in the Debreu (1954) theory of value tradition for a class of adverse selection economies which includes the Spence (1973) signaling and Rothschild-Stiglitz (1976) insurance environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.