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

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 the importance of the opposite: dregs skimming, whereby high-risk consumers are proÞtably detracted from the candidate pooling contract. JEL Nos: D82; G22; L14 ∗We have received helpful comments from Georges Dionne and two anonymous referees and able research assistance from Gaute Erichsen. Part of Nilssen’s research was done during a visit at the Haas School of Business at the University of California, Berkeley, and he gratefully acknowledges their hospitality, as well as travel grants from the Research Council of Norway and the U.S.-Norway Fulbright Foundation for Educational Exchange. Part of Lund’s research was done during a visit at the Department of Economics at Copenhagen Business School, and he gratefully acknowledges their hospitality. †Correspondence: Tore Nilssen, Department of Economics, University of Oslo, P.O.Box 1095 Blindern, N-0317 Oslo, Norway. Phone: 47 22 85 49 36. Fax: 47 22 85 50 35.