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The probationary period as a screening device: competitive markets

Spreeuw, J. and Karlsson, M. (2006). The probationary period as a screening device: competitive markets (Report No. Actuarial Research Paper No. 168). London, UK: Faculty of Actuarial Science & Insurance, City University London.

Abstract

Seminal papers about asymmetry of information in a competitive insurance market, and the monetary deductible as a screening device show that any existing equilibrium is of a separating type. High risks buy complete insurance whilst low risks buy partial insurance. Rothschild and Stiglitz (1976) deal with insurance companies showing Nash behaviour, while Miyazaki (1977) and Spence (1978) consider firms with Wilson foresight. In this paper, we analyze the strength of the probationary period as a screening device. We show that in such a case a) under Nash behavior, low risks may prefer not to purchase any insurance at all in equilibrium and b)under Wilson foresight, a pooling equilibrium may exist.

Publication Type: Monograph (Working Paper)
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Actuarial Science & Insurance > Actuarial Research Reports
URI: http://openaccess.city.ac.uk/id/eprint/2300
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