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  • American Economic Journal: Applied Economics

Beyond Statistics: The Economic Content of Risk Scores

By: Liran Einav, Amy Finkelstein, Raymond Kluender and Paul Schrimpf
  • Format:Print
  • | Pages:30
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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.

Keywords

Analytics and Data Science; Risk and Uncertainty; Insurance Industry

Citation

Einav, Liran, Amy Finkelstein, Raymond Kluender, and Paul Schrimpf. "Beyond Statistics: The Economic Content of Risk Scores." American Economic Journal: Applied Economics 8, no. 2 (April 2016): 195–224.
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About The Author

Raymond P. Kluender

Entrepreneurial Management
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