American Economic Review Vol. 97 No. 3 2007

Estimating Risk Preferences from Deductible Choice

Alma Cohen¹; Liran Einav²

¹ Department of Economics, Tel Aviv University, P.O. Box 39040, Ramat Aviv, Tel Aviv 69978, Israel, National Bureau of Economic Research, and Harvard Law School John M. Olin Research Center for Law, Economics, and Business. · ² Department of Economics, Stanford University, Stanford, CA 94305-6072, and NBER.

Abstract

We develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts. We account for adverse selection by modeling unobserved heterogeneity in both risk (claim rate) and risk aversion. We find large and skewed heterogeneity in risk attitudes. In addition, women are more risk averse than men, risk aversion exhibits a U-shape with respect to age, and proxies for income and wealth are positively associated with absolute risk aversion. Finally, unobserved heterogeneity in risk aversion is greater than that of risk, and, as we illustrate, has important implications for insurance pricing.

DOI

10.1257/aer.97.3.745

Volume

97

Issue

3

Pages

745-788

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

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