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Estimation of Insurance Deductible Demand Under Endogenous Premium Rates
Author(s) -
Woodard Joshua D.,
Yi Jing
Publication year - 2020
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.12260
Subject(s) - endogeneity , deductible , economics , subsidy , estimation , price elasticity of demand , econometrics , government (linguistics) , identification (biology) , actuarial science , microeconomics , botany , management , market economy , biology , linguistics , philosophy
Government‐subsidized insurance is ubiquitous, yet estimation of demand in such markets remains challenging. The premium charged for a given deductible is determined by actuarial construction; thus, observed choice‐pairs are endogenous leading to biased estimation under standard econometric approaches. A theoretical model and simulation study are developed, and a new identification strategy proposed. An empirical application using Federal Crop Insurance Program—a $100 billion/year program—data reveals that demand is quite elastic after accounting for this endogeneity. Mistreatment of such endogeneity is likely partly responsible for pervasive faulty findings of inelastic insurance demand in related applications. Policy implications are also discussed.