Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 01-2003: Cream Skimming, Dregs Skimming, and Pooling: On the Dynamics of Competitive Screening.

Diderik Lund and Tore Nilssen
Additional contact information
Diderik Lund: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Tore Nilssen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

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 phenom- enon of cream skimming emphasized in earlier literature, we here point to the the importance of the opposite: dregs skimming, whereby high-risk consumers are pro√ětably detracted from the candidate pooling contract.

Keywords: Insurance; Insurance Companies; Transactional relationships; Reputation

JEL-codes: D82; G22; L14

24 pages, March 20, 2003

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