Identifying Moral Hazard in Car Insurance Contracts - HUJI.pdf

Identifying Moral Hazard in Car Insurance Contracts1 Sarit Weisburd The Hebrew University September 12, 2010 1I would like to thank Yehuda Shavit for his thoughtful advice on the nature of insurance data and its research potential. Without his help this work would not have been possible. I would like to thank my advisor Professor Saul Lach for his guidance and support. Additionally, I would like to thank Motti Mor for providing insight and information on car insurance in Israel. Finally, I want to express my appreciation to participants in the Seventh CEPR School on Applied Industrial Organization as well as Professor Josh Angrist, Professor David Genesove, and Professor Daniel Nagin for their helpful comments and suggestions on an earlier draft. I gratefully acknowledge Önancial support from the Israel National Road Safety Authority Doctoral Fellowship. E-mail: sarit.weisburd@mail.huji.ac.il. Abstract This paper capitalizes on a unique situation in Israel where car insurance coverage is often distributed as a beneÖt by employers. Employer-determined coverage creates an environ- ment where individuals are ìas ifî randomly allocated to di§erent insurance contracts regardless of their preferences. In this situation, the confounding e§ects of adverse selec- tion are removed, and the e§ect of car insurance on driving behavior and on car accidents reáects moral hazard. Using data provided by an insurance Örm in Israel (2001-2008) and controlling for state dependence and unobserved heterogeneity, I Önd that employees beneÖting from company insurance ñholding higher insurance coverage at a lower cost ñ are 3.6 percentage points more likely to have an accident. This estimate increa