Working Paper: NBER ID: w29096
Authors: Yizhou Jin; Shoshana Vasserman
Abstract: New technologies have enabled firms to elicit granular behavioral data from consumers in exchange for lower prices and better experiences. This data can mitigate asymmetric information and moral hazard, but it may also increase firms’ market power if kept proprietary. We study a voluntary monitoring program by a major U.S. auto insurer, in which drivers accept short-term tracking in exchange for potential discounts on future premiums. Using a proprietary dataset matched with competitor price menus, we document that safer drivers self-select into monitoring, and those who opt in become yet 30% safer while monitored. Using an equilibrium model of consumer choice and firm pricing for insurance and monitoring, we find that the monitoring program generates large profit and welfare gains. However, large demand frictions hurt monitoring adoption, forcing the firm to offer large discounts to induce opt-in while preventing the unmonitored pool from unraveling given the competitive environment. A counterfactual policy requiring the firm to make monitoring data public would thus further reduce the firm’s incentive to elicit monitoring data, leading to less monitoring and lower consumer welfare in equilibrium.
Keywords: auto insurance; monitoring programs; consumer data; behavioral data; firm profitability
JEL Codes: L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monitoring program (C88) | Advantageous selection (C52) |
| Monitoring score (Y10) | Predictive of risk (G17) |
| Monitoring program (C88) | Total annual surplus (H62) |
| Reduced monitoring incentives (G18) | Less monitoring (Y50) |
| Less monitoring (Y50) | Lower consumer welfare (D11) |
| Monitoring participation (E63) | Safer driving behavior (R48) |
| Safer driving behavior (R48) | Firm profit and welfare gains (D21) |