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Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening

Author

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  • Diderik Lund

    (Department of Economics, University of Oslo, P.O. Box 1095 Blindern, N-0317 Oslo, Norway, e-mail: diderik.lund@econ.uio.no)

  • Tore Nilssen

    (Department of Economics, University of Oslo, P.O. Box 1095 Blindern, N-0317 Oslo, Norway, e-mail: tore.nilssen@econ.uio.no)

Abstract

We discuss the existence of a pooling equilibrium in a two-period model of an insurance market with asymmetric information. We solve the model numerically. We pay particular attention to the reasons for non-existence in cases where no pooling equilibrium exists. In addition to the phenomenon of cream skimming emphasized in earlier literature, we here point to the importance of the opposite: dregs skimming, whereby high-risk consumers are profitably detracted from the candidate pooling contract. The Geneva Papers on Risk and Insurance Theory (2004) 29, 23–41. doi:10.1023/B:GEPA.0000032564.19797.21

Suggested Citation

  • Diderik Lund & Tore Nilssen, 2004. "Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 29(1), pages 23-41, June.
    • Handle: RePEc:pal:genrir:v:29:y:2004:i:1:p:23-41
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    References listed on IDEAS

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    1. Dionne, Georges & Doherty, Neil A, 1994. "Adverse Selection, Commitment, and Renegotiation: Extension to and Evidence from Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 209-235, April.
    2. Joseph E. Stiglitz, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 407-430.
    3. Parigi, Bruno M., 1994. "Self selection in a dynamic credit model," European Journal of Political Economy, Elsevier, vol. 10(3), pages 571-590, October.
    4. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    5. Szpiro, George G, 1986. "Measuring Risk Aversion: An Alternative Approach," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 156-159, February.
    6. Asheim, Geir B. & Nilssen, Tore, 1996. "Non-discriminating renegotiation in a competitive insurance market," European Economic Review, Elsevier, vol. 40(9), pages 1717-1736, December.
    7. Nilssen, Tore, 2000. "Consumer lock-in with asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 641-666, May.
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    Cited by:

    1. Jobst, Andreas A., 2002. "The Pricing puzzle: The default term structure of collateralised loan obligations," CFS Working Paper Series 2002/14, Center for Financial Studies (CFS).
    2. Jobst, Andreas A., 2002. "Loan securitisation: default term structure and asset pricing based on loss prioritisation," LSE Research Online Documents on Economics 24941, London School of Economics and Political Science, LSE Library.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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