title: Beyond Statistics: The Economic Content of Risk Scores.
abstract: "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.
authors.affiliation: Department of Economics, Stanford University, 579 Serra Mall, Stanford, CA 94305-6072 and NBER.
authors.forename: Liran
authors.initials: L
authors.lastname: Einav
authors.affiliation: Department of Economics, MIT, 50 Memorial Drive, Cambrdige, MA 02142-1347 and NBER.
authors.forename: Amy
authors.initials: A
authors.lastname: Finkelstein
authors.affiliation: Department of Economics, MIT, 50 Memorial Drive, Cambrdige, MA 02142-1347.
authors.forename: Raymond
authors.initials: R
authors.lastname: Kluender
authors.affiliation: Department of Economics, The University of British Columbia, 997-1873 East Mall, Vancouver B.C. Canada V6T 1Z1.
authors.forename: Paul
authors.initials: P
authors.lastname: Schrimpf