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

55 Pages Posted: 16 Dec 2015

See all articles by Philipp Kircher

Philipp Kircher

University of Edinburgh

Keith M. Marzilli Ericson

Boston University - Markets, Public Policy, and Law; National Bureau of Economic Research (NBER)

Johannes Spinnewijn

London School of Economics & Political Science (LSE)

Amanda Starc

Kellogg School of Management, Northweste

Multiple version iconThere are 2 versions of this paper

Date Written: December 2015

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.

Keywords: heterogeneity, identification, insurance

JEL Classification: D81, D83, G22

Suggested Citation

Kircher, Philipp and Ericson, Keith M. Marzilli and Spinnewijn, Johannes and Starc, Amanda, Inferring Risk Perceptions and Preferences Using Choice from Insurance Menus: Theory and Evidence (December 2015). CEPR Discussion Paper No. DP10981. Available at SSRN: https://ssrn.com/abstract=2704475

Philipp Kircher (Contact Author)

University of Edinburgh ( email )

Keith M. Marzilli Ericson

Boston University - Markets, Public Policy, and Law ( email )

Boston, MA
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Johannes Spinnewijn

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
00 44 (0) 20 7955 7022 (Phone)

HOME PAGE: http://econ.lse.ac.uk/staff/spinnewijn_johannes/

Amanda Starc

Kellogg School of Management, Northweste ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
3303382067 (Phone)

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