Estimating Risk Preferences from Deductible Choice

65 Pages Posted: 2 Aug 2005 Last revised: 20 Jul 2009

See all articles by Alma Cohen

Alma Cohen

Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER)

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

We use a large data set of deductible choices in auto insurance contracts to estimate the distribution of risk preferences in our sample. To do so, we develop a structural econometric model, which accounts for adverse selection by allowing for unobserved heterogeneity in both risk (probability of an accident) and risk aversion. Ex-post claim information separately identifies the marginal distribution of risk, while the joint distribution of risk and risk aversion is identified by the deductible choice. We find that individuals in our sample have on average an estimated absolute risk aversion which is higher than other estimates found in the literature. Using annual income as a measure of wealth, we find an average two-digit coefficient of relative risk aversion. We also find that women tend to be more risk averse than men, that proxies for income and wealth are positively related to absolute risk aversion, that unobserved heterogeneity in risk preferences is higher relative to that of risk, and that unobserved risk is positively correlated with unobserved risk aversion. Finally, we use our results for counterfactual exercises that assess the profitability of insurance contracts under various assumptions.

Suggested Citation

Cohen, Alma and Einav, Liran, Estimating Risk Preferences from Deductible Choice (July 2005). NBER Working Paper No. w11461. Available at SSRN: https://ssrn.com/abstract=755697

Alma Cohen

Tel Aviv University - Eitan Berglas School of Economics ( email )

Ramat Aviv, Tel Aviv, 69978
Israel

Harvard Law School ( email )

Cambridge, MA 02138
United States
(617) 496-4099 (Phone)
(617) 812-0554 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3704 (Phone)
928-223-4973 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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