American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Estimating Risk Preferences from Deductible Choice
American Economic Review
vol. 97,
no. 3, June 2007
(pp. 745–788)
Abstract
We develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts. We account for adverse selection by modeling unobserved heterogeneity in both risk (claim rate) and risk aversion. We find large and skewed heterogeneity in risk attitudes. In addition, women are more risk averse than men, risk aversion exhibits a U-shape with respect to age, and proxies for income and wealth are positively associated with absolute risk aversion. Finally, unobserved heterogeneity in risk aversion is greater than that of risk, and, as we illustrate, has important implications for insurance pricing. (JEL D81, G22)Citation
Cohen, Alma, and Liran Einav. 2007. "Estimating Risk Preferences from Deductible Choice." American Economic Review, 97 (3): 745–788. DOI: 10.1257/aer.97.3.745Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G22 Insurance; Insurance Companies; Actuarial Studies