Beyond Statistics: The Economic Content of Risk Scores
- (pp. 195-224)
Abstract
"Big data" and statistical techniques to score potential transactions have transformed insurance and credit markets. In this paper, we observe that these widely-used statistical scores summarize a much richer heterogeneity, and may be endogenous to the context in which they get applied. We demonstrate this point empirically using data from Medicare Part D, showing that risk scores confound underlying health and endogenous spending response to insurance. We then illustrate theoretically that when individuals have heterogeneous behavioral responses to contracts, strategic incentives for cream-skimming can still exist, even in the presence of "perfect" risk scoring under a given contract. (JEL C55, G22, G28, H51, I13)Citation
Einav, Liran, Amy Finkelstein, Raymond Kluender, and Paul Schrimpf. 2016. "Beyond Statistics: The Economic Content of Risk Scores." American Economic Journal: Applied Economics, 8 (2): 195-224. DOI: 10.1257/app.20150131Additional Materials
JEL Classification
- C55 Large Data Sets: Modeling and Analysis
- G22 Insurance; Insurance Companies; Actuarial Studies
- G28 Financial Institutions and Services: Government Policy and Regulation
- H51 National Government Expenditures and Health
- I13 Health Insurance, Public and Private
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