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Beyond Statistics: The Economic Content of Risk Scores.


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.

SUBMITTER: Einav L 

PROVIDER: S-EPMC4945120 | biostudies-other | 2016 Apr

REPOSITORIES: biostudies-other

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Beyond Statistics: The Economic Content of Risk Scores.

Einav Liran L   Finkelstein Amy A   Kluender Raymond R   Schrimpf Paul P  

American economic journal. Applied economics 20160401 2


"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  ...[more]

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