Re-Examining Moral Hazard Under Inattention: New Evidence from Behavioral Data in Auto Insurance

15 Pages Posted: 23 May 2023

See all articles by Yizhou Jin

Yizhou Jin

Rotman School of Management

Date Written: May 19, 2023

Abstract

This paper uses novel sensor data to study drivers’ risky phone use behavior. The results challenge the conventional wisdom of moral hazard in insurance. We first identify handheld phone use behavior (“HPU”) and quantify its causal impact on accident likelihood (“riskiness”) using exhaustive fixed-effect models. We then find HPU to be risky but insensitive to both insurance coverage changes and weather shocks that increase its riskiness. This contradicts the prevailing theoretical prediction and empirical studies that have thus far relied on claims data alone. On the other hand, an experiment with a one-time text-message warning led to a persistent 15% HPU reduction. Drivers’ inattention to risk thus limits moral hazard.

Keywords: moral hazard, auto insurance, ex-ante moral hazard, sensor data, risky driving

JEL Classification: G22, L80

Suggested Citation

Jin, Yizhou, Re-Examining Moral Hazard Under Inattention: New Evidence from Behavioral Data in Auto Insurance (May 19, 2023). Available at SSRN: https://ssrn.com/abstract=4453814 or http://dx.doi.org/10.2139/ssrn.4453814

Yizhou Jin (Contact Author)

Rotman School of Management ( email )

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HOME PAGE: http://yjin.io

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