Screening equilibria in experimental markets

Posey, Lisa L.; Yavaş, Abdullah

doi:10.1007/s10713-007-0007-z

Cited by 17 publications

(16 citation statements)

References 24 publications

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“…Depending on the proportions of high risk and low risk individuals on the market, the theoretical prediction is a separating equilibrium (if low risk individuals are relatively few) or a pooling equilibrium (if low risk individuals are relatively many). Posey and Yavas (2007) found a convergence of observed behaviour toward the equilibrium prediction. In the contribution of Asparouhova (2006), the RS model is studied in the context of competitive lending under adverse selection.…”

Section: Introductionmentioning

confidence: 61%

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Competitive Insurance Markets and Adverse Selection in the Lab

2010

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Section: Introductionmentioning

confidence: 61%

“…Their experimental data provide partial support to the RS model. The paper of Posey and Yavas (2007) focused on the behaviour of insurers faced to simulated high risk and low risk individuals. Their aim was to test the insurers' ability to screen their customers in a competitive setting.…”

Section: Introductionmentioning

confidence: 99%

Competitive Insurance Markets and Adverse Selection in the Lab

2010

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“…The closest is Posey and Yavas (2003). It studies experimental insurance markets where sellers can compete on the prices of (only) two insurance contracts.…”

Section: Related Literaturementioning

confidence: 99%

Competition in Lending: Theory and Experiments*

Asparouhova

2006

Review of Finance

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A variation of the Rothschild-Stiglitz' equilibrium is examined in the context of competitive lending under adverse selection. The predictions of the model are tested in an experimental market setting. If equilibrium exists, it predicts that the loan contracts offered and taken separate the projects being financed by quality. When equilibrium exists, the experiments confirm the theory.The entrepreneurs with high-risk projects take bigger loans and bear higher credit spreads than those with low-risk projects. When equilibrium does not exist, which happens exactly when the candidate for equilibrium does not provide a Pareto-optimal allocation, in half of the sessions loan trading stabilizes around the candidate equilibrium pair. In the other half, however, markets never settle down. This finding has important implications. When lenders can offer menus of contracts, as is usually the case in the real world, the outcome may not be the zero-profit separating contracts of the standard model in the theory of corporate finance. Worse, as an example in the paper illustrates, fitting the standard model to field data may lead to serious biases in estimated parameters while falsely accepting the model's main restriction (separation). * The financial support of the Division of Humanities and Social Sciences at Caltech is gratefully acknowledged. I would like to thank Charles Plott, Thomas Palfrey, Bill Zame, Mike Lemmon, as well as the seminar participants at Caltech, UCSD, Duke, Berkeley, Stanford, University of Utah, Columbia, Georgia State University, Tulane, University of Houston, and Arizona State University for helpful comments. I am especially grateful to Peter Bossaerts for all his suggestions and comments, and the staff of EEPS, SSEL, and CASSEL for their help in running the experiments. All errors are my own.

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“…Second, no experiment with controls for preferences has been conducted before in the context of insurance. Third, by designing two successive experiments, we are able to assess the effectiveness of deductible 12 Posey and Yavas (2007). 13 Asparouhova (2006).…”

Section: Introductionmentioning

confidence: 99%

Competitive Insurance Markets and Adverse Selection in the Lab

Riahi

Lévy‐Garboua

Montmarquette

2013

Geneva Risk Insur Rev

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We provide an experimental analysis of competitive insurance markets with adverse selection. Our parameterised version of the lemons' model of Akerlof in the insurance context predicts total crowding-out of low risks when insurers offer a single full insurance contract. The therapy proposed by Rothschild and Stiglitz consists of adding a partial insurance contract so as to obtain self-selection of risks. We test the theoretical predictions of these two models in two experiments. A clean test is obtained by matching the parameters of these experiments and by controlling for the risk neutrality of insurers and the common risk aversion of their clients by means of the binary lottery procedure. The results reveal a partial crowding-out of low risks in the first experiment. Crowding-out is not eliminated in the second experiment and it is not even significantly reduced. Finally, instead of the predicted separating equilibrium, we find pooling equilibria. The latter can be sustained because insureds who objectively differ in their risk level do not perceive themselves as being so much different.

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Screening equilibria in experimental markets

Cited by 17 publications

References 24 publications

Competitive Insurance Markets and Adverse Selection in the Lab

Competitive Insurance Markets and Adverse Selection in the Lab

Competition in Lending: Theory and Experiments*

Competitive Insurance Markets and Adverse Selection in the Lab

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