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

William G. Morrison and Bradley Ruffle

Department of Economics Working Papers from McMaster University

Abstract: 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.

Keywords: experimental economics; insurance; dishonesty; claim buildup; known reporting distribution (search for similar items in EconPapers)
JEL-codes: C91 D82 G22 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2024-06
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-rmg
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Journal Article: Do higher insurance premiums provoke larger reported losses? An experimental study (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2024-05

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