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Are Risk Preferences Stable across Contexts? Evidence from Insurance Data

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  • Levon Barseghyan
  • Jeffrey Prince
  • Joshua C. Teitelbaum

Abstract

Using a unique dataset, we test whether households' deductible choices in auto and home insurance reflect stable risk preferences. Our test relies on a structural model that assumes households are objective expected utility maximizers and claims are generated by household-coverage specific Poisson processes. We find that the hypothesis of stable risk preferences is rejected by the data. Our analysis suggests that many households exhibit greater risk aversion in their home deductible choices than their auto deductible choices. Our results are robust to several alternative modeling assumptions. (JEL D11, D83)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 2 (April)
Pages: 591-631

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:591-631

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  1. Jaap Abbring & Pierre-André Chiappori & Tibor Zavadil, 2008. "Better Safe than Sorry? Ex Ante and Ex Post Moral Hazard in Dynamic Insurance Data," Tinbergen Institute Discussion Papers 08-075/3, Tinbergen Institute.
  2. Cameron, A Colin & Trivedi, Pravin K, 1986. "Econometric Models Based on Count Data: Comparisons and Applications of Some Estimators and Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(1), pages 29-53, January.
  3. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05.
  4. Manel Baucells & Antonio Villasís, 2010. "Stability of risk preferences and the reflection effect of prospect theory," Theory and Decision, Springer, vol. 68(1), pages 193-211, February.
  5. repec:dgr:uvatin:2008075 is not listed on IDEAS
  6. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  7. Lisa R. Anderson & Jennifer M. Mellor, 2008. "Are Risk Preferences Stable? Comparing an Experimental Measure with a Validated Survey-Based Measure," Working Papers 74, Department of Economics, College of William and Mary.
  8. Jaap H. Abbring & Pierre-Andre Chiappori, 2004. "Moral Hazard and Dynamic Insurance Data," 2004 Meeting Papers 316, Society for Economic Dynamics.
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