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Pay-As-You-Go Insurance: Experimental Evidence on Consumer Demand and Behavior

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  • Raymond Kluender

Abstract

Pay-as-you-go contracts reduce minimum purchase requirements, which may increase market participation. This paper randomizes the introduction and price(s) of a novel pay-as-you-go contract to the California auto insurance market, where 17% of drivers are uninsured. The pay-as-you-go contract increases take-up by 10.8 p.p. (89%) and days with coverage by 4.6 days over the 3-month experiment (27%). Demand is relatively inelastic, and pay-as-you-go increases insurance coverage in part by relaxing liquidity requirements: most drivers’ purchasing behavior is consistent with a cost of credit in excess of payday lending rates, and 19% of drivers have a purchase rejected for insufficient funds.

Suggested Citation

  • Raymond Kluender, 2024. "Pay-As-You-Go Insurance: Experimental Evidence on Consumer Demand and Behavior," The Review of Financial Studies, Society for Financial Studies, vol. 37(4), pages 1118-1148.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:4:p:1118-1148.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad080
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    More about this item

    Keywords

    D14; G22; G52; R41;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G52 - Financial Economics - - Household Finance - - - Insurance
    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise

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