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Adverse Selection and Moral Hazard in the Dynamic Model of Auto Insurance

Author

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  • Elena Krasnokutskaya

    (Johns Hopkins University)

  • Przemyslaw Jeziorski

    (UC Berkeley)

Abstract

We use the data on multiple years of contract choices and claims by customers of a major Portuguese car insurance company to investigate a possibility that agent’s risk is modifiable through costly (unobserved) effort. Using a model of contract choice and endogenous risk production we demonstrate the economic importance of moral hazard, measure the relative importance of agents’ private information on cost of reducing risk and risk aversion, and evaluate the relative effectiveness of dynamic versus static contract features in incentivizing effort and inducing sorting on unobserved risk.

Suggested Citation

  • Elena Krasnokutskaya & Przemyslaw Jeziorski, 2016. "Adverse Selection and Moral Hazard in the Dynamic Model of Auto Insurance," 2016 Meeting Papers 1514, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1514
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    References listed on IDEAS

    as
    1. Liran Einav & Amy Finkelstein & Stephen P. Ryan & Paul Schrimpf & Mark R. Cullen, 2013. "Selection on Moral Hazard in Health Insurance," American Economic Review, American Economic Association, vol. 103(1), pages 178-219, February.
    2. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, June.
    3. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
    4. Cardon, James H & Hendel, Igal, 2001. "Asymmetric Information in Health Insurance: Evidence from the National Medical Expenditure Survey," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 408-427, Autumn.
    5. Tibor Zavadil & Pierre-Andre Chiappori & Jaap H. Abbring, 2007. "Better Safe than Sorry? Ex Ante and Ex Post Moral Hazard in Dynamic Insurance," 2007 Meeting Papers 869, Society for Economic Dynamics.
    6. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-1057, September.
    7. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, June.
    8. Gaurab Aryal & Isabelle Perrigne & Quang Vuong, 2011. "Nonidentification of Insurance Models with Probability of Accidents," ANU Working Papers in Economics and Econometrics 2011-552, Australian National University, College of Business and Economics, School of Economics.
    Full references (including those not matched with items on IDEAS)

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