nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒02‒26
nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. A Model of Income Insurance and Social Norms By Lindbeck, Assar; Persson, Mats
  2. The Dynamics of Trust and Trustworthiness on EBay. An Evolutionary Analysis of Buyer Insurance and Seller Reputation By Friederike Mengel; Axel Ockenfels; Werner Güth
  3. Determinants of deposit-insurance adoption and design By Laeven, Luc; Kane, Edward J.; Demirguc-Kunt, Asli
  4. Collateral and Risk Sharing in group lending: evidence from an urban microcredit program By Maurice Kugler; Rossella Oppes
  5. Life is Cheap: Using Mortality Bonds to Hedge Aggregate Mortality Risk By Leora Friedberg; Anthony Webb
  6. Job Security and Work Absence: Evidence from a Natural Experiment By Lindbeck, Assar; Palme, Mårten; Persson, Mats
  7. An Experimental Evaluation of the Serial Cost Sharing Rule By Laura Razzolini; Michael Reksulak; Robert Dorsey
  8. Perverse Incentives in the Medicare Prescription Drug Benefit By David McAdams; Michael Schwarz
  9. Stochastic Choice Under Risk By Pavlo R. Blavatskyy

  1. By: Lindbeck, Assar (The Research Institute of Industrial Economics); Persson, Mats (Institute for International Economic Studies)
    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 (“mimicking”). 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: 2006–01–25
  2. By: Friederike Mengel; Axel Ockenfels; Werner Güth
    Abstract: Applying an evolutionary framework, we investigate how a reputation mechanism and a buyer insurance (as used on Internet market platforms such as eBay) interact to promote trustworthiness and trust. Our analysis suggests that the costs involved in giving reliable feedback determine the gains from trade that can be obtained in equilibrium. Buyer insurance, on the other hand, can affect the trading dynamics and equilibrium selection. We find that, under reasonable conditions, buyer insurance crowds out trust and trustworthiness.
    Date: 2006–01
  3. By: Laeven, Luc; Kane, Edward J.; Demirguc-Kunt, Asli
    Abstract: The authors seek to identify factors that influence decisions about a country ' s financial safety net, using a new dataset on 170 countries covering the 1960-2003 period. Specifically, they focus on how outside influences, economic development, crisis pressures, and political institutions affect deposit insurance adoption and design. Controlling for the influence of economic characteristics and events such as macroeconomic shocks, occurrence and severity of crises, and insti tutional development, they find that pressure to emulate developed-country regulatory frameworks and power-sharing political institutions dispose a country toward adopting design features that inadequately control risk-shifting.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Financial Intermediation,Insurance & Risk Mitigation,Financial Crisis Management & Restructuring
    Date: 2006–02–01
  4. By: Maurice Kugler; Rossella Oppes
    Abstract: Empirical research on the impact and determinants of group lending is by now substantial. However, very little is known about the possible role of collateral to mitigate incentive problems in group lending. This is because microcredit programs have normally been implemented in rural areas of developing countries. Indeed, the reason for this choice is lack of credit access since agents with collateral are very rare. Also, to the extent that rural communities have tight-knit hierarchical structures information about borrowers is accessible and the enforcement of sanctions via social networks makes collateral superfluous for default mitigation. Yet, in an urban setting in which information is more atomized and social sanctions are not as powerful, collateral may have an important role in group lending. First, we illustrate in a model the role of collateral to mitigate group default. Second, we use data from a group lending program implemented in 2001 in Cotonou, the largest city in Benin with more than one million inhabitants. We empirically explore the risk profile of individual borrowers and resulting group heterogeneity to identify the role of personal contributions to investment projects. Our evidence suggests that while diversification within groups facilitates risk pooling, it also increases expected bailout or group default costs for low risk borrowers. Collateral helps offset and alleviate potential negative spillovers from group default induced by membership of borrowers with risky projects. The presence of borrowers with collateral facilitates access to credit for group members without collateral, who in turn provide insurance against group default. We find joint liability to be a mechanism for risk sharing in a setting where poor households lack resources for collateral and insurance markets are missing.
    Keywords: Group lending, mutual cosigners, collateral, risk sharing, strategic
    JEL: O12 O17 G20 D82
    Date: 2005
  5. By: Leora Friedberg; Anthony Webb
    Abstract: Using the widely-cited Lee-Carter mortality model, we quantify aggregate mortality risk as the risk that the average annuitant lives longer than is predicted by the model, and we conclude that annuity business exposes insurance companies to substantial mortality risk. We calculate that a markup of 3.7% on an annuity premium (or else shareholders’ capital equal to 3.7% of the expected present value of annuity payments) would reduce the probability of insolvency resulting from uncertain aggregate mortality trends to 5% and a markup of 5.4% would reduce the probability of insolvency to 1%. Using the same model, we find that a projection scale commonly referred to by the insurance industry underestimates aggregate mortality improvements. Annuities that are priced on that projection scale without any conservative margin appear to be substantially underpriced. Insurance companies could deal with aggregate mortality risk by transferring it to financial markets through mortality-contingent bonds, one of which has recently been offered. We calculate the returns that investors would have obtained on such bonds had they been available over a long period. Using both the Capital and the Consumption Capital Asset Pricing Models, we determine the risk premium that investors would have required on such bonds. At plausible coefficients of risk aversion, annuity providers should be able to hedge aggregate mortality risk via such bonds at a very low cost.
    JEL: G12 G22 G23 J11 J14
    Date: 2006–01
  6. By: Lindbeck, Assar (The Research Institute of Industrial Economics); Palme, Mårten (Stockholm University); Persson, Mats (Institute for International Economic Studies)
    Abstract: We analyze the consequences for sickness absence of a selective softening of job security legislation for small firms in Sweden in 2001. According to our differences-in-difference estimates, aggregate absence in these firms fell by 0.2-0.3 days per year. This aggregate net figure hides important effects on different groups of employees. Workers remaining in the reform firms after the reform reduced their absence by about one day. People with a high absence record tended to leave reform firms, but these firms also became less reluctant to hire people with a record of high absence.
    Keywords: Seniority Rules; Sick Pay Insurance; Firing Costs; Moral Hazard
    JEL: H53 I38 J22 J50 M51
    Date: 2006–02–14
  7. By: Laura Razzolini (Department of Economics, VCU School of Business); Michael Reksulak (Georgia Southern University); Robert Dorsey (FNC, Inc.)
    Abstract: This paper proposes an experimental test of the strategic equilibrium properties of the serial cost sharing rule originally proposed by Shenker (1990) and then analyzed by Moulin and Shenker (1992). We report measure of the performance and efficiency of the serial mechanism by comparing the choices and payoffs attained by the subjects to the expected first best allocations. Experimental evidence shows that, while some learning is needed, the serial mechanism leads to almost efficient allocations.
    Date: 2004–11
  8. By: David McAdams; Michael Schwarz
    Abstract: We analyze some of the perverse incentives that may arise under the current Medicare prescription drug benefit design. In particular, risk adjustment for a stand-alone prescription drug benefit creates perverse incentives for prescription drug plans' coverage decisions and/or pharmaceutical companies' pricing decisions. This problem is new in that it does not arise with risk adjustment for other types of health care coverage. For this and other reasons, Medicare's drug benefit requires especially close regulatory oversight, now and in the future. We also consider a relatively minor change in how the benefit is financed that could lead to significant changes in how it functions. In particular, if all plans were required to charge the same premium, there would be less diversity in quality but also less budgetary uncertainty and less upward pressure on drug prices.
    JEL: I1
    Date: 2006–02
  9. By: Pavlo R. Blavatskyy
    Abstract: An individual makes random errors when evaluating the expected utility of a risky lottery. Errors are symmetrically distributed around zero as long as an individual does not make transparent mistakes such as choosing a risky lottery over its highest possible outcome for certain. This stochastic decision theory explains many well-known violations of expected utility theory such as the fourfold pattern of risk attitudes, the discrepancy between certainty equivalent and probability equivalent elicitation methods, the preference reversal phenomenon, the generalized common consequence effect (the Allais paradox), the common ratio effect and the violations of the betweenness.
    Keywords: expected utility theory, stochastic utility, Fechner model, random error, risk
    JEL: C91 D81
    Date: 2006–02

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