Beyond Statistics: The Economic Content of Risk Scores
"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...
| Main Authors: | , , , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
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American Economic Association
2017
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| Online Access: | http://hdl.handle.net/1721.1/109558 https://orcid.org/0000-0002-9941-6684 https://orcid.org/0000-0002-0551-169X |
| _version_ | 1826213046157049856 |
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| author | Einav, Liran Finkelstein, Amy Kluender, Raymond Peter Schrimpf, Paul Thomas |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Einav, Liran Finkelstein, Amy Kluender, Raymond Peter Schrimpf, Paul Thomas |
| author_sort | Einav, Liran |
| collection | MIT |
| description | "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) |
| first_indexed | 2024-09-23T15:42:28Z |
| format | Article |
| id | mit-1721.1/109558 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T15:42:28Z |
| publishDate | 2017 |
| publisher | American Economic Association |
| record_format | dspace |
| spelling | mit-1721.1/1095582022-09-29T15:39:36Z Beyond Statistics: The Economic Content of Risk Scores Einav, Liran Finkelstein, Amy Kluender, Raymond Peter Schrimpf, Paul Thomas Massachusetts Institute of Technology. Department of Economics Finkelstein, Amy Kluender, Raymond Peter Schrimpf, Paul Thomas "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) National Institute on Aging (R01 AG032449) 2017-06-02T18:33:21Z 2017-06-02T18:33:21Z 2016-04 Article http://purl.org/eprint/type/JournalArticle 1945-7782 1945-7790 http://hdl.handle.net/1721.1/109558 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 https://orcid.org/0000-0002-9941-6684 https://orcid.org/0000-0002-0551-169X en_US http://dx.doi.org/10.1257/app.20150131 American Economic Journal: Applied Economics Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. application/pdf American Economic Association American Economic Association |
| spellingShingle | Einav, Liran Finkelstein, Amy Kluender, Raymond Peter Schrimpf, Paul Thomas Beyond Statistics: The Economic Content of Risk Scores |
| title | Beyond Statistics: The Economic Content of Risk Scores |
| title_full | Beyond Statistics: The Economic Content of Risk Scores |
| title_fullStr | Beyond Statistics: The Economic Content of Risk Scores |
| title_full_unstemmed | Beyond Statistics: The Economic Content of Risk Scores |
| title_short | Beyond Statistics: The Economic Content of Risk Scores |
| title_sort | beyond statistics the economic content of risk scores |
| url | http://hdl.handle.net/1721.1/109558 https://orcid.org/0000-0002-9941-6684 https://orcid.org/0000-0002-0551-169X |
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