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AER - June 2007

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American Economic Review

Vol. 97, No. 3, June 2007

Estimating Risk Preferences from Deductible Choice Alma Cohen and Liran Einav
Article Citation
Cohen, Alma, and Liran Einav. 2007. "Estimating Risk Preferences from Deductible Choice." American Economic Review, 97(3): 745–788.
DOI:10.1257/aer.97.3.745
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. (JEL D81, G22)

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Authors

Cohen, Alma
Einav, Liran

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