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

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  • 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
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    File URL: http://eprints.lse.ac.uk/87780/
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    Cited by:

    1. Camille Landais & Arash Nekoei & Peter Nilsson & David Seim & Johannes Spinnewijn, 2017. "Risk-based Selection in Unemployment Insurance: Evidence and Implications," STICERD - Public Economics Programme Discussion Papers 33, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    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. 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.
    4. Jeroen Hinloopen & Adriaan R. Soetevent, 2016. "(Non-)Insurance Markets, Loss Size Manipulation and Competition - Experimental Evidence," Tinbergen Institute Discussion Papers 16-033/VII, Tinbergen Institute.
    5. Kattih Nour & Mixon Franklin G., 2020. "Employee Choice and the Demand for Health Insurance Coverage: Evidence from Random Coefficients Models," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(2), pages 1-13, April.
    6. 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).

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    More about this item

    Keywords

    heterogeneity; identification and insurance;

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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