IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/87780.html
   My bibliography  Save this paper

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

Author

Listed:
  • Ericson, Keith Marzilli
  • Kircher, Philipp
  • Spinnewijn, Johannes
  • Starc, Amanda

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 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.

Suggested Citation

  • Ericson, Keith Marzilli & Kircher, Philipp & Spinnewijn, Johannes & Starc, Amanda, 2015. "Inferring risk perceptions and preferences using choice from insurance menus: theory and evidence," LSE Research Online Documents on Economics 87780, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:87780
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/87780/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pierre-Andre Chiappori & Amit Gandhi & Bernard Salanie & Francois Salanie, 2009. "Identifying Preferences under Risk from Discrete Choices," American Economic Review, American Economic Association, vol. 99(2), pages 356-362, May.
    2. Benjamin R. Handel & Jonathan T. Kolstad & Johannes Spinnewijn, 2019. "Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 326-340, May.
    3. Liran Einav & Amy Finkelstein & Jonathan Levin, 2010. "Beyond Testing: Empirical Models of Insurance Markets," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 311-336, September.
    4. Abi Adams & Laurens Cherchye & Bram De Rock & Ewout Verriest, 2014. "Consume Now or Later? Time Inconsistency, Collective Choice, and Revealed Preference," American Economic Review, American Economic Association, vol. 104(12), pages 4147-4183, December.
    5. Jason Abaluck & Jonathan Gruber, 2011. "Choice Inconsistencies among the Elderly: Evidence from Plan Choice in the Medicare Part D Program," American Economic Review, American Economic Association, vol. 101(4), pages 1180-1210, June.
    6. Gaurab Aryal & Isabelle Perrigne & Quang Vuong, 2011. "Identification of Insurance Models with Multidimensional Screening," ANU Working Papers in Economics and Econometrics 2011-538, Australian National University, College of Business and Economics, School of Economics.
    7. David M. Cutler & Amy Finkelstein & Kathleen McGarry, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," American Economic Review, American Economic Association, vol. 98(2), pages 157-162, May.
    8. Eduardo M. Azevedo & Daniel Gottlieb, 2017. "Perfect Competition in Markets With Adverse Selection," Econometrica, Econometric Society, vol. 85, pages 67-105, January.
    9. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2010. "Optimal Mandates and the Welfare Cost of Asymmetric Information: Evidence From the U.K. Annuity Market," Econometrica, Econometric Society, vol. 78(3), pages 1031-1092, May.
    10. Ian Crawford & Bram De Rock, 2014. "Empirical Revealed Preference," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 503-524, August.
    11. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    12. Jason Abaluck & Jonathan Gruber, 2011. "Heterogeneity in Choice Inconsistencies among the Elderly: Evidence from Prescription Drug Plan Choice," American Economic Review, American Economic Association, vol. 101(3), pages 377-381, May.
    13. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, June.
    14. Johannes Spinnewijn, 2017. "Heterogeneity, Demand for Insurance, and Adverse Selection," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 308-343, February.
    15. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2010. "Estimating Welfare in Insurance Markets Using Variation in Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 877-921.
    16. Mark Dean & Daniel Martin, 2016. "Measuring Rationality with the Minimum Cost of Revealed Preference Violations," The Review of Economics and Statistics, MIT Press, vol. 98(3), pages 524-534, July.
    17. Amanda Starc, 2014. "Insurer pricing and consumer welfare: evidence from Medigap," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 198-220, March.
    18. Chetty, Nadarajan & Finkelstein, Amy Nadya, 2013. "Social Insurance: Connecting Theory to Data," Scholarly Articles 34330197, Harvard University Department of Economics.
    19. Ichimura, Hidehiko & Thompson, T. Scott, 1998. "Maximum likelihood estimation of a binary choice model with random coefficients of unknown distribution," Journal of Econometrics, Elsevier, vol. 86(2), pages 269-295, June.
    20. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84, March.
    21. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
    22. Ian Crawford, 2010. "Habits Revealed," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1382-1402.
    23. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency, Heterogeneity, and Granularity of Individual Behavior under Uncertainty," Economics Working Papers 0076, Institute for Advanced Study, School of Social Science.
    24. Kowalski Amanda E. & Congdon William J. & Showalter Mark H., 2008. "State Health Insurance Regulations and the Price of High-Deductible Policies," Forum for Health Economics & Policy, De Gruyter, vol. 11(2), pages 1-26, November.
    25. Levon Barseghyan & Francesca Molinari & Ted O'Donoghue & Joshua C. Teitelbaum, 2013. "The Nature of Risk Preferences: Evidence from Insurance Choices," American Economic Review, American Economic Association, vol. 103(6), pages 2499-2529, October.
    26. M. Kate Bundorf & Jonathan Levin & Neale Mahoney, 2012. "Pricing and Welfare in Health Plan Choice," American Economic Review, American Economic Association, vol. 102(7), pages 3214-3248, December.
    27. Andrew Caplin & Mark Dean, 2015. "Revealed Preference, Rational Inattention, and Costly Information Acquisition," American Economic Review, American Economic Association, vol. 105(7), pages 2183-2203, July.
    28. Marika Cabral & Neale Mahoney, 2019. "Externalities and Taxation of Supplemental Insurance: A Study of Medicare and Medigap," American Economic Journal: Applied Economics, American Economic Association, vol. 11(2), pages 37-73, April.
    29. Ericson, Keith M. Marzilli & Starc, Amanda, 2016. "How product standardization affects choice: Evidence from the Massachusetts Health Insurance Exchange," Journal of Health Economics, Elsevier, vol. 50(C), pages 71-85.
    30. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
    31. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    32. Pierre‐André Chiappori & Bernard Salanié & François Salanié & Amit Gandhi, 2019. "From Aggregate Betting Data to Individual Risk Preferences," Econometrica, Econometric Society, vol. 87(1), pages 1-36, January.
    33. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
    34. Jonathan Gruber & Robin McKnight, 2016. "Controlling Health Care Costs through Limited Network Insurance Plans: Evidence from Massachusetts State Employees," American Economic Journal: Economic Policy, American Economic Association, vol. 8(2), pages 219-250, May.
    35. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    36. Keith M. Marzilli Ericson, 2014. "Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 38-64, February.
    37. Keith M. Marzilli Ericson & Amanda Starc, 2015. "Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange," The Review of Economics and Statistics, MIT Press, vol. 97(3), pages 667-682, July.
    38. Daniel McFadden, 2005. "Revealed stochastic preference: a synthesis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(2), pages 245-264, August.
    39. Liran Einav & Amy Finkelstein & Iuliana Pascu & Mark R. Cullen, 2012. "How General Are Risk Preferences? Choices under Uncertainty in Different Domains," American Economic Review, American Economic Association, vol. 102(6), pages 2606-2638, October.
    40. Keith Marzilli Ericson & Amanda Starc, 2012. "Heuristics and Heterogeneity in Health Insurance Exchanges: Evidence from the Massachusetts Connector," American Economic Review, American Economic Association, vol. 102(3), pages 493-497, May.
    41. Benjamin R. Handel & Jonathan T. Kolstad, 2015. "Health Insurance for "Humans": Information Frictions, Plan Choice, and Consumer Welfare," American Economic Review, American Economic Association, vol. 105(8), pages 2449-2500, August.
    42. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    43. Michael D. Grubb, 2015. "Behavioral Consumers in Industrial Organization," Boston College Working Papers in Economics 879, Boston College Department of Economics.
    44. Ethan M. J. Lieber, 2017. "Does It Pay to Know Prices in Health Care?," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 154-179, February.
    45. Ian Crawford & Krishna Pendakur, 2013. "How many types are there?," Economic Journal, Royal Economic Society, vol. 123, pages 77-95, March.
    46. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
    47. Saurabh Bhargava & George Loewenstein & Justin Sydnor, 2015. "Do Individuals Make Sensible Health Insurance Decisions? Evidence from a Menu with Dominated Options," NBER Working Papers 21160, National Bureau of Economic Research, Inc.
    48. Levon Barseghyan & Francesca Molinari & Joshua C. Teitelbaum, 2016. "Inference under stability of risk preferences," Quantitative Economics, Econometric Society, vol. 7(2), pages 367-409, July.
    49. Justin Sydnor, 2010. "(Over)insuring Modest Risks," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 177-199, October.
    50. Benjamin R. Handel, 2013. "Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts," American Economic Review, American Economic Association, vol. 103(7), pages 2643-2682, December.
    51. Amit Gandhi & Ricardo Serrano-Padial, 2015. "Does Belief Heterogeneity Explain Asset Prices: The Case of the Longshot Bias," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 156-186.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Camille Landais & Arash Nekoei & Peter Nilsson & David Seim & Johannes Spinnewijn, 2021. "Risk-Based Selection in Unemployment Insurance: Evidence and Implications," American Economic Review, American Economic Association, vol. 111(4), pages 1315-1355, April.
    2. Keith Marzilli Ericson & Justin Sydnor, 2017. "The Questionable Value of Having a Choice of Levels of Health Insurance Coverage," Journal of Economic Perspectives, American Economic Association, vol. 31(4), pages 51-72, Fall.
    3. Chenyuan Liu & Justin R. Sydnor, 2018. "Dominated Options in Health-Insurance Plans," NBER Working Papers 24392, National Bureau of Economic Research, Inc.
    4. Jeroen Hinloopen & Adriaan R. Soetevent, 2020. "(Non‐)Insurance Markets, Loss Size Manipulation and Competition: Experimental Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 68(4), pages 819-856, December.
    5. Jason Abaluck & Giovanni Compiani, 2020. "A Method to Estimate Discrete Choice Models that is Robust to Consumer Search," NBER Working Papers 26849, National Bureau of Economic Research, Inc.
    6. Hermanns, Benedicta & Kairies-Schwarz, Nadja & Kokot, Johanna & Vomhof, Markus, 2023. "Heterogeneity in health insurance choice: An experimental investigation of consumer choice and feature preferences," hche Research Papers 29, University of Hamburg, Hamburg Center for Health Economics (hche).
    7. Dronyk-Trosper Trey & Stitzel Brandli, 2020. "Analyzing the Effect of Mandatory Water Restrictions on Water Usage," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(2), pages 1-13, April.
    8. David de Meza & Diane Reyniers, 2023. "Insuring Replaceable Possessions," Economica, London School of Economics and Political Science, vol. 90(357), pages 271-284, January.
    9. Soetevent, Adriaan & Hinloopen, Jeroen, 2016. "(Non-)Insurance Markets, Loss Size Manipulation and Competition," Research Report 16009-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
    2. Nathaniel Hendren & Camille Landais & Johannes Spinnewijn, 2021. "Choice in Insurance Markets: A Pigouvian Approach to Social Insurance Design," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 457-486, August.
    3. Johannes Spinnewijn, 2017. "Heterogeneity, Demand for Insurance, and Adverse Selection," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 308-343, February.
    4. Benjamin R. Handel & Jonathan T. Kolstad & Johannes Spinnewijn, 2019. "Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets," The Review of Economics and Statistics, MIT Press, vol. 101(2), pages 326-340, May.
    5. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    6. Bernard Salanié, 2017. "Equilibrium in Insurance Markets: An Empiricist’s View," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 42(1), pages 1-14, March.
    7. Benjamin R. Handel & Jonathan T. Kolstad, 2013. "Health Insurance for "Humans": Information Frictions, Plan Choice, and Consumer Welfare," NBER Working Papers 19373, National Bureau of Economic Research, Inc.
    8. Glenn W. Harrison, 2019. "The behavioral welfare economics of insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 44(2), pages 137-175, September.
    9. Tomas Pedro Sanguinetti, 2019. "How Do Couples Choose Individual Insurance Plans? Evidence from Medicare Part D," 2019 Papers psa1760, Job Market Papers.
    10. Ericson, Keith M. Marzilli & Starc, Amanda, 2016. "How product standardization affects choice: Evidence from the Massachusetts Health Insurance Exchange," Journal of Health Economics, Elsevier, vol. 50(C), pages 71-85.
    11. Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2023. "Optimal Insurance: Dual Utility, Random Losses and Adverse Selection," ECONtribute Discussion Papers Series 242, University of Bonn and University of Cologne, Germany.
    12. Johannes G. Jaspersen & Marc A. Ragin & Justin R. Sydnor, 2022. "Predicting insurance demand from risk attitudes," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(1), pages 63-96, March.
    13. Timothy J. Layton & Randall P. Ellis & Thomas G. McGuire, 2015. "Assessing Incentives for Adverse Selection in Health Plan Payment Systems," Boston University - Department of Economics - Working Papers Series wp2015-024, Boston University - Department of Economics.
    14. Benjamin R. Handel & Jonathan T. Kolstad, 2021. "The Affordable Care Act After a Decade: Industrial Organization of the Insurance Exchanges," NBER Working Papers 29178, National Bureau of Economic Research, Inc.
    15. Camille Landais & Arash Nekoei & Peter Nilsson & David Seim & Johannes Spinnewijn, 2021. "Risk-Based Selection in Unemployment Insurance: Evidence and Implications," American Economic Review, American Economic Association, vol. 111(4), pages 1315-1355, April.
    16. Li Donni, P., 2010. "Risk Preference Heterogeneity And Multiple Demand For Insurance," Health, Econometrics and Data Group (HEDG) Working Papers 10/17, HEDG, c/o Department of Economics, University of York.
    17. Neale Mahoney & E. Glen Weyl, 2017. "Imperfect Competition in Selection Markets," The Review of Economics and Statistics, MIT Press, vol. 99(4), pages 637-651, July.
    18. Sonia Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Health Insurance Markups," Working Papers 2017-084, Human Capital and Economic Opportunity Working Group.
    19. Andreas Richter & Jörg Schiller & Harris Schlesinger, 2014. "Behavioral insurance: Theory and experiments," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 85-96, April.
    20. Normann Lorenz, 2014. "Adverse selection and heterogeneity of demand responsiveness," Research Papers in Economics 2014-02, University of Trier, Department of Economics.

    More about this item

    Keywords

    heterogeneity; identification and insurance;

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:87780. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.