Beyond Statistics: The Economic Content of Risk Scores
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Finkelstein_Beyond statistics.pdf
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792.1 KB
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Author(s)
Einav, Liran
Finkelstein, Amy
Kluender, Raymond Peter
Schrimpf, Paul Thomas
Date Issued
April 2016
Journal
American Economic Journal: Applied Economics
Publisher
American Economic Association
Citation
Einav, Liran; Finkelstein, Amy; Kluender, Raymond and Schrimpf, Paul. “ Beyond Statistics: The Economic Content of Risk Scores.” American Economic Journal: Applied Economics 8, no. 2 (April 2016): 195–224 © 2016 American Economic Association
Version
Final published version
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)
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1257/app.20150131
