"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.
No takes yet. Share an insight, caveat, or question.
Einav et al. (2016) studied this question.
Synapse has enriched 5 closely related papers on similar clinical questions. Consider them for comparative context: