Thursday, August 20, 2020

Voluntary Driver Monitoring and Auto Insurance

Would you be willing to install a device to track your driving behavior if it could save you on auto insurance? A paper by Yizhou Jen and Shoshana Vasserman finds that not many people are, but those that do install the device reveal a lot about information asymmetries, adverse selection, and moral hazard.

First, the authors find evidence of adverse selection: "Safer drivers are more likely to opt in, even holding financial risk and rewards fixed." Thus, insurance companies give discounts for agreeing to the tracking device because only safer drivers would agree to install it.

Second, they find evidence of moral hazard: "Drivers become 30% safer when monitored." Knowing that Big Insurance Brother is watching makes us change our behavior.

As discussed in the book, the answer to "is this information problem an example of adverse selection or of moral hazard" is usually "both." This relates to a similar study discussed in a previous post.

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