Beyond Statistics: The Economic Content of Risk Scores

Liran Einav, Amy Finkelstein, Raymond Kluender and Paul Schrimpf

American Economic Journal: Applied Economics, 2016, vol. 8, issue 2, 195-224

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)

JEL-codes: C55 G22 G28 H51 I13 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/app.20150131
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Citations: View citations in EconPapers (8)

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Working Paper: Beyond Statistics: The Economic Content of Risk Scores (2015)
Working Paper: Beyond Statistics: The Economic Content of Risk Scores
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