Beyond Statistics: The Economic Content of Risk Scores
Author(s)
Einav, Liran; Finkelstein, Amy; Kluender, Raymond Peter; Schrimpf, Paul Thomas
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"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)
Date issued
2016-04Department
Massachusetts Institute of Technology. Department of EconomicsJournal
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
ISSN
1945-7782
1945-7790