nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒02‒19
five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The impact of explicit deposit insurance on market discipline By Ioannidou,Vasso P.; Dreu,Jan de
  2. A Model of Income Insurance and Social Norms By Lindbeck, Assar; Persson, Mats
  3. Deliver us from Evil: Religion as insurance By Andrew Clark; Orsolya Lelkes
  4. On Substituting Consumption Taxes for Unemployment Insurance Contributions to Reduce Unemployment By Tomas Kögel
  5. Conditional Indexation in Defined Benefit Pension Plans By Jacob A. Bikker; Peter J.G. Vlaar

  1. By: Ioannidou,Vasso P.; Dreu,Jan de (Tilburg University, Center for Economic Research)
    Abstract: This paper studies the impact of explicit deposit insurance on market discipline in a framework that resembles a natural experiment. We improve upon previous studies by exploiting a unique combination of country-specific circumstances, design features, and data availability that allows us to distinguish between demand and supply effects. We show that deposit insurance causes a significant reduction in market discipline. We also show that the effect of deposit insurance depends on the coverage rate. When the coverage rate is more than 60 percent, market discipline is significantly reduced and it is completely eliminated when the coverage rate reaches 100 percent. Our results also suggest that most market discipline comes from large depositors and that the introduction of deposit insurance affected mainly those who were already active in imposing discipline. Our findings emphasize the need for binding coverage limits per depositor, high degrees of co-insurance, and "tailor made" deposit insurance systems that preserve the incentives of a critical mass of depositors that are willing and able to perform this function.
    Keywords: market discipline;deposit insurance;deposit insurance coverage; G21
    JEL: F30 F41 G28
    Date: 2006
  2. By: Lindbeck, Assar (Institute for International Economic Studies, Stockholm University); Persson, Mats (Institute for International Economic Studies, Stockholm University)
    Abstract: A large literature on ex ante moral hazard in income insurance emphasizes that the individual can affect the probability of an income loss by choice of lifestyle and hence, the degree of risk-taking. The much smaller literature on moral hazard ex post mainly analyzes how a “moral hazard constraint†can make the individual abstain from fraud (“mimickingâ€). The present paper instead presents a model of moral hazard ex post without a moral hazard constraint; the individual's ability and willingness to work is represented by a continuous stochastic variable in the utility function, and the extent of moral hazard depends on the generosity of the insurance system. Our model is also well suited for analyzing social norms concerning work and benefit dependency.
    Keywords: Moral hazard; sick pay insurance; labor supply; asymmetric information
    JEL: G22 H53 I38 J21
    Date: 2006–02–14
  3. By: Andrew Clark (CNRS, PSE, and IZA); Orsolya Lelkes (European Centre for Social Welfare Policy and Research)
    Abstract: This paper focusses on the insurance role of religion in buffering the well-being impact of stressful life events, and the ensuing economic and social implications. Using two large-scale European data sets, we show that the religious enjoy higher levels of life satisfaction, and that religion does insure against some adverse life events. All denominations suffer less psychological harm from unemployment than do the non-religious; equally both Catholics and Protestants are less hurt by marital separation. However, while Protestants are protected against divorce, Catholics are punished for it. These results do not seem to come about from the endogeneity of religion. These patterns in subjective well-being correspond to data on both attitudes (the religious are both anti-divorce and anti-job creation for the unemployed) and behaviour (the religious unemployed are less likely to be actively looking for work). In panel data, as implied by insurance, the religious have less variation in life satisfaction. Last, we suggest that religion’s insurance role might be reflected in support for different economic and social systems: consistent with this, unemployment replacement rates across Europe are lower in more religious countries.
    Keywords: Life Satisfaction, Religion, Unemployment, Marriage, Divorce, Insurance.
    JEL: I31 J12 J65 Z12
    Date: 2006–02–15
  4. By: Tomas Kögel (Dept of Economics, Loughborough University)
    Abstract: The German conservative party (consisting of two sister parties) planned in case of victory in the national election on 18 September 2005 to reduce the unemployment insurance contributions by 2 percent and to finance this with an increase in the consumption tax by 2 percent. The present paper shows in a Layard-Nickell-Jackman type wage bargaining model that this tax reform does not reduce unemployment; neither in the short to medium run, nor in the long run. When there is short-to-medium-run real wage resistance, then in the short to medium run unemployment depends on the overall tax burden, but not on the composition of the tax burden. In the long run the wage setting curve is vertical and hence in the long run unemployment is even invariant of the overall tax burden.
    Keywords: Consumption taxes, unemployment insurance contributions, payroll taxes. wage bargaining, unemployment.
    JEL: H20 J51
    Date: 2005–09
  5. By: Jacob A. Bikker; Peter J.G. Vlaar
    Abstract: In the Netherlands, the typical pension contract nowadays comprises an average earnings defined benefit pension in which only nominal benefits are guaranteed, but with the intention to provide wage indexation. In the new supervisory regime, the guaranteed pension rights, based on market valuation, are subject to risk-based solvency requirements. Provisioning is not required for conditional pension rights, though contributions have to be consistent with the indexation ambition, as communicated with the participants. This paper analyses to what extent indexation is indeed likely, given different indexation and contribution policies. Thereby, it explains how intergenerational risk sharing in defined benefit pension plans can provide a reasonable insurance of pension benefits against wage or price inflation. Moreover, it illustrates the tenability of defined benefit pension plans under ageing, the new fair-value accounting regimes, and possible volatility on financial markets. The analysis is based on a stochastic Pension Asset and Liability Model for the Netherlands (PALMNET). According to the PALMNET simulations, voluntary provisioning for indexation is to be recommended. Without reserving, indexation cuts may be severe and the solvency requirements incidentally lead to extreme premiums. Fully guaranteed indexation is virtually unaffordable under the new supervisory regime, because the real discount rate is generally both very low and volatile.
    Keywords: Average wage defined benefit pension; Monte Carlo simulations; Regulation. J.E.L. Code: C15; C59; G23; J18
    JEL: C33 E41 G3
    Date: 2006–02

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