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Inferring Risk Perceptions and Preferences Using Choice from Insurance Menus: Theory and Evidence

Author

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

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.

Suggested Citation

  • Keith Marzilli Ericson & Philipp Kircher & Johannes Spinnewijn & Amanda Starc, 2021. "Inferring Risk Perceptions and Preferences Using Choice from Insurance Menus: Theory and Evidence," The Economic Journal, Royal Economic Society, vol. 131(634), pages 713-744.
    • Handle: RePEc:oup:econjl:v:131:y:2021:i:634:p:713-744.
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    File URL: http://hdl.handle.net/10.1093/ej/ueaa069
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    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. 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.
    5. 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.
    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. repec:bpj:bejeap:v:20:y:2020:i:2:p:13:n:9 is not listed on IDEAS
    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).

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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