Do higher insurance premiums provoke larger reported losses? An experimental study

We report on a laboratory experiment to investigate whether the price paid for insurance explains dishonesty in reporting an insurance claim. In the experiment, participants earn money in a realeffort task, but risk losing some of this income through one of four randomly assigned and privately observed loss amounts. Prior to observing and reporting their loss, participants indicate their reservation price for an insurance policy that pays an indemnity equal to their stated loss. Participants are insured if their randomly assigned premium is less than or equal to their stated reservation price. This mechanism provides data on each participant’s consumer surplus from the purchase of insurance. After receiving their cash earnings minus their assigned loss amount in private, participants report their loss. Our results indicate that the propensity to dishonestly report an inflated loss neither increases in the amount paid for insurance nor decreases in the consumer surplus associated with an insurance purchase.