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Dynamic Moral Hazard: A Longitudinal Examination of Automobile Insurance in Canada
Author(s) -
Shi Peng,
Zhang Wei,
Boucher JeanPhilippe
Publication year - 2018
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12172
Subject(s) - spurious relationship , moral hazard , context (archaeology) , econometrics , economics , actuarial science , hazard , panel data , microeconomics , statistics , incentive , mathematics , paleontology , chemistry , organic chemistry , biology
This article examines moral hazard in the context of dynamic contracting in automobile insurance. Economic theory shows that experience rating of insurers results in state dependence of driving behavior under moral hazard. The empirical analysis is performed using a longitudinal data set from a Canadian automobile insurer. We employ dynamic nonlinear panel data models to distinguish the structural and spurious state dependence, and thus moral hazard and selection on unobservables. As a measure of the riskiness of driving, we consider the frequency, the number, as well as the cost of claims for the policyholder. We find that the state dependence in claim cost reflects both structural and spurious relationships, supporting the moral hazard hypothesis. However, the state dependence in claim occurrence is solely due to unobserved heterogeneity.