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  3. American Economic Review
  4. June 2007
  5. Estimating Risk Preferences from Deductible Choice

Estimating Risk Preferences from Deductible Choice

  • Alma Cohen
  • Liran Einav
American Economic Review
vol. 97, no. 3, June 2007
(pp. 745-788)
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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)

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

Additional Materials

JEL Classification

  • D81 Criteria for Decision-Making under Risk and Uncertainty
  • G22 Insurance; Insurance Companies; Actuarial Studies