Re-examining Moral Hazard under Inattention: New Evidence from Behavioral Data in Auto Insurance

This paper uses novel sensor data to study drivers' risky phone use behavior. The results challenge the conventional wisdom of moral hazard in insurance. We first identify handheld phone use behavior ("HPU") and quantify its causal impact on accident likelihood ("riskiness") using exhaustive fixed-effect models. We then find HPU to be risky but insensitive to both insurance coverage changes and weather shocks that increase its riskiness. This contradicts the prevailing theoretical prediction and empirical studies that have thus far relied on claims data alone. On the other hand, an experiment with a one-time text-message warning led to a persistent 15% HPU reduction. Drivers' inattention to risk thus limits moral hazard.