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Screening equilibria in experimental markets

  • Lisa L. Posey

    (Penn State University, Business Building, University Park, PA 16802, USA, e-mail: llp3@psu.edu)

  • Abdullah Yavas

    (Penn State University, Business Building, University Park, PA 16802, USA, e-mail: ayavas@psu.edu)

We conduct an experimental test of a screening model of an insurance market with asymmetric information. We first conduct three sessions in which the proportion of high risk buyers is such that a separating equilibrium should exist. We then conduct three more sessions in which the only change we make is decreasing the proportion of high risks such that the equilibrium is now a pooling equilibrium. In both treatments, the observed behavior converges to the equilibrium prediction. The Geneva Risk and Insurance Review (2007) 32, 147–167. doi:10.1007/s10713-007-0007-z

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Article provided by Palgrave Macmillan in its journal The Geneva Risk And Insurance Review.

Volume (Year): 32 (2007)
Issue (Month): 2 (December)
Pages: 147-167

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Handle: RePEc:pal:genrir:v:32:y:2007:i:2:p:147-167
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  1. Miller, Ross M. & Plott, Charles R., . "Product Quality Signaling in Experimental Markets," Working Papers 447, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Davis, Douglas D & Williams, Arlington W, 1991. "The Hayek Hypothesis in Experimental Auctions: Institutional Effects and Market Power," Economic Inquiry, Western Economic Association International, vol. 29(2), pages 261-74, April.
  3. Kübler, D. & Müller, W. & Normann, H.T., 2003. "Job Market Signalling and Screening : An Experimental Comparison," Discussion Paper 2003-124, Tilburg University, Center for Economic Research.
  4. Hoy, Michael, 1982. "Categorizing Risks in the Insurance Industry," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 321-36, May.
  5. Cadsby, Charles B & Frank, Murray & Maksimovic, Vojislav, 1990. "Pooling, Separating, and Semiseparating Equilibria in Financial Markets: Some Experimental Evidence," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 315-42.
  6. Brown-Kruse, Jamie, et al, 1994. "Bertrand-Edgeworth Competition in Experimental Markets," Econometrica, Econometric Society, vol. 62(2), pages 343-72, March.
  7. Cooper, Russell & Hayes, Beth, 1987. "Multi-period insurance contracts," International Journal of Industrial Organization, Elsevier, vol. 5(2), pages 211-231.
  8. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  9. Crocker, Keith J. & Snow, Arthur, 1985. "The efficiency of competitive equilibria in insurance markets with asymmetric information," Journal of Public Economics, Elsevier, vol. 26(2), pages 207-219, March.
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