Inferring risk perceptions and preferences using choice from insurance menus: theory and evidence

Ericson, Keith Marzilli, Kircher, Philipp and Spinnewijn, Johannes ORCID: 0000-0002-7963-5847 (2020) Inferring risk perceptions and preferences using choice from insurance menus: theory and evidence. Economic Journal. ISSN 0013-0133

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Abstract

Demand for insurance can be driven by high risk aversion or high risk. We show how to separately identify risk preferences and risk types using only choices from menus of insurance plans. Our revealed preference approach does not rely on rational expectations, nor does it require access to claims data. We show what can be learned non-parametrically about the type distributions from variation in insurance plans, offered separately to random cross-sections or offered as part of the same menu to one cross-section. We prove that our approach allows for full identification in the textbook model with binary risks and extend our results to continuous risks. We illustrate our approach using the Massachusetts Health Insurance Exchange, where choices provide informative bounds on the type distributions, especially for risks, but do not allow us to reject homogeneity in preferences.

Item Type:	Article
Additional Information:	© 2020 Royal Economic Society
Divisions:	Centre for Economic Performance Economics
Subjects:	H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies
Date Deposited:	28 Aug 2020 10:42
Last Modified:	16 Nov 2024 00:24
URI:	http://eprints.lse.ac.uk/id/eprint/106266

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