The concept of risk aversion is important for macroeconomics, finance, and insurance. This award funds innovative research that will provide direct evidence regarding the degree and hetereogeneity of individual risk aversion. Much of the existing evidence is based on laboratory experiments and answers given by individuals to hypothetical survey questions. This project is different because it uses market data about individual decisions about insurance purchases. These data are combined with information about insurance claims history.
The PI and his co-author will develop a structural econometric model based on expected utility theory. This model will be used to analyze data from the market for automobile insurance in Israel. Individuals are allowed to vary in two unobserved dimensions -- their level of risk and their coefficient of absolute risk aversion -- and the econometric model will allow the researchers to estimate the joint distribution of these two factors. This information will then be combined with ex-post data on insurance claims to allow the investigators to separate actual levels of accident risk from risk aversion.
The result sfrom this project will benefit policymakers and others who need to predict the decisions individuals make in a variety of risky situations. This includes most insurance and financial markets.
