Working Paper: NBER ID: w11461
Authors: Alma Cohen; Liran Einav
Abstract: We use a large data set of deductible choices in auto insurance contracts to estimate the distribution of risk preferences in our sample. To do so, we develop a structural econometric model, which accounts for adverse selection by allowing for unobserved heterogeneity in both risk (probability of an accident) and risk aversion. Ex-post claim information separately identifies the marginal distribution of risk, while the joint distribution of risk and risk aversion is identified by the deductible choice. We find that individuals in our sample have on average an estimated absolute risk aversion which is higher than other estimates found in the literature. Using annual income as a measure of wealth, we find an average two-digit coefficient of relative risk aversion. We also find that women tend to be more risk averse than men, that proxies for income and wealth are positively related to absolute risk aversion, that unobserved heterogeneity in risk preferences is higher relative to that of risk, and that unobserved risk is positively correlated with unobserved risk aversion. Finally, we use our results for counterfactual exercises that assess the profitability of insurance contracts under various assumptions.
Keywords: risk aversion; deductibles; auto insurance; adverse selection
JEL Codes: D82; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| correlation between risk and risk aversion (D81) | misestimations of adverse selection (D82) |
| risk preferences (D81) | deductible choices (G52) |
| deductible choices (G52) | unobserved heterogeneity in risk aversion (D81) |
| unobserved risk (D80) | unobserved risk aversion (D81) |
| income and wealth (D31) | absolute risk aversion (D81) |
| gender (J16) | absolute risk aversion (D81) |
| unobserved heterogeneity in risk preferences (D81) | unobserved heterogeneity in risk exposure (D80) |
| risk exposure (G22) | risk aversion (D81) |