TLDR​:

This paper complements the paper of weather effects on vehicle sales by providing
evidence that consumers are overly inuenced by something other than weather.

In this article, the authors use transaction-level data from a large Chinese insurance
company to examine the role that idiosyncratic variation in daily air pollution plays in
an individual’s decision to purchase or cancel health insurance.

They nd that both the purchase and cancellation of health insurance policies are
signicantly inuenced by idiosyncratic variation in daily air pollution levels.
Specically, they nd that, when air pollution is high, individuals are more likely to
purchase insurance contracts.

In addition, insurance contracts are more likely to be canceled fair pollution improves
during the government-mandated10-day“regret period”.This cancellation effect is
negatively related to air pollution during the cooling-off period (CoP) and is driven by
the change in air pollution relative to the level at the time of purchase. That is,
individuals are more likely to buy insurance when pollution is high and more likely to
cancel it if air pollution levels are lower during the CoPrelative to the date of
purchase

Finally, the results provides evidence in support of the hypothesis put forth in
Loewenstein et al. (2003) that “cooling-off laws” might be effective “as devices for
combating the effects of projection bias”

Empirical Results

Effect of AQI on purchases

Regression: Log(Insurance)=βAQI+Xγ+D+e,

Insurance: number of insurance purchased on a date t

AQI: high hourly AQI over date t and t-1. Allows pollution in the evening before to
take effect
X: weather vector. Accounts for weather effect.
D: date vector. Accounts for fixed seasonal effect

Result for β according to AQI

AQI < 150 (Healthy): statistically insignificant
AQI > 150 (Unhealthy: statistically insignificant
AQI 150-200 = 16.8%
AQI 200-300 = 16.8%
AQI 300+ = 23.4%

Taken together, these results indicate that the air pollution in one’s immediate vicinity
increases demand for health insurance, and that this increase in demand occurs only
when air pollution has reached levels associated with noticeable and immediate
health effects.

To check for robustness, the authors run regression with:

- Air pollution across cities -> statistically insignificant -> Indicate that demand
for health insurance is affected by only local, and not regional idiosyncratic
variation in air pollution levels
- Non-health insurance as dependent variable -> statistically insignificant ->
indicates that for an unobservable factor to be driving our results it must be
very limited in scope affecting only the demand for health insurance contracts
- Seasonal pattern (by month, weke, daya, with coarse and fine specification)
-> Across all specications, we nd a strong and statistically signicant
relationship between pollution and the demand for health insurance -> No
adequate effect of seasonal pattern

Effects of AQI on cancellations

Regression: Cancel=f(AQIt,...,AQIt+11)β+Cb+X+D+e

Cancel: 1 if cancel, 0 if not cancel

AQI: high hourly AQI over date t and t-1. Allows pollution in the evening before to
take effect
C: controls for policy characteristics (age, gender,...)
X: weather vector. Accounts for weather effect.
D: date vector. Accounts for fixed seasonal effect

They use 4 different specifications of AQI

- First test for level of difference

- Second test for level of order-date AQI and average AQI

- Third is like second but have separate regressor

 - Fourth includes dummy variable to indicate whether air pollution during the
Cool off Perioid (CoP) is lower

Results:
- First test: a negative and statistically signicant relationship between
RelativeAQI and cancellations, indicating that decreases in AQI relative to
order-date AQI leads to increases in the probability of cancellation.
- Second test: higher order-date AQI leads to a positive and statistically
signicant increase in cancellations, whereas CoPAQI has the opposite effect
- Third test: same result as second
- Fourth test: order-date AQI no longer predicts an increased probability of
cancellation. This result suggests that, as predicted by our model, the impact
of air pollution on cancellation rates is driven by relative differences and not
absolute levels

The authors also test robustness of the regression with non-health insurance
contracts and insurance contract characteristics. Both yield insignificant results,
supporting the robustness of the main model.

Mechanism

Learning

To assess whether the increase in demand associated with daily pollution is driven
by intertemporal substitution,we estimate a distributed lag model.
The result of this regression shows that the coefcients for the lagged pollution are
smaller and never statistically signicant. This indicates that the increase in daily
sales generated by air pollution can be interpreted as an increase in the aggregate
demand for insurance rather than a change in intertemporal substitution across days.
Thus, it rules out the possibility that learning by inattentive individuals is the only
mechanism at work.

Projection bias
The authors does some manipulation to the Loewenstein model to arrive at their
model for demand for insurance

These results generate a pair of testable predictions that exactly match their results:
(1) Negative transitory health shocks (st) will increase contemporaneous demand for
health insurance.
(2) If individuals feel healthier during the CoPrelative to the order-date (i.e., st+1<st),
they are (weakly) more likely to cancel their insurance policy.

Because of this match, projection bias is likely a mechanism at work.

Mistaken belief

2 different channels:
- Under the mistaken belief channel, a cold day causes individuals to
mistakenly believe that there will be more cold days in the future.
- According to projection bias, a cold day causes individuals to mistakenly
believe they will receive higher utility from a cold weather coat on non-cold
days

To test for which channel is the right mechanism, they run an online survey designed
to elicit individual’s beliefs regarding pollution in their city residence in the future.

The result nds no relationship between AQI and one’s beliefs about air pollution in a
year’s time. These results do not provide empirical support for the mistaken belief
hypothesis, these results also do not provide particularly strong evidence against it.

Salience

The authors cite previous papers to conclude that it is difficult to differentiate

between salience and projection bias.