Abstract
We use Bewley’s (1986) notion of Knightian uncertainty to reexamine competitive insurance market analysis of Rothschild and Stiglitz (1976). In the symmetric information case, there may be multiple equilibria, and the equilibrium insurance contracts depend on endowment, probability of accident and loss of an accident, which is in contrast to the result that consumers would always choose full insurance contract in a competitive insurance market as predicted by the analysis relying on expected utility theory. When insurance companies cannot observe insuree’s probability of accident, we find that a pooling equilibrium would not exist, separating equilibrium would exist under some circumstances, and, different from the Rothschild and Stiglitz’s (1976) result, the insurance company may offer full- or over-insurance contract to low risk consumers.