nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒09‒30
five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Medicaid Crowd-Out of Private Long-Term Care Insurance Demand: Evidence from the Health and Retirement Survey By Jeffrey R. Brown; Norma B. Coe; Amy Finkelstein
  2. When prices hardly matter: Incomplete insurance contracts and markets for repair goods By Nell, Martin; Richter, Andreas; Schiller, Jörg
  3. Do corporate financial patterns in European countries converge and testitfy for disintermediation? By Rivaud-Danset, Dorothée; Oheix, Valérie
  4. Are Tournaments Optimal over Piece Rates under Limited Liability for the Principal? By Kosmas Marinakis; Theofanis Tsoulouhas
  5. Ex Ante Liability Rules in New Zealand's Health and Safety in Employment Act: A Law and Economics Analysis By Paul Gordon; Alan E. Woodfield

  1. By: Jeffrey R. Brown; Norma B. Coe; Amy Finkelstein
    Abstract: This paper provides empirical evidence of Medicaid crowd out of demand for private long-term care insurance. Using data on the near- and young-elderly in the Health and Retirement Survey, our central estimate suggests that a $10,000 decrease in the level of assets an individual can keep while qualifying for Medicaid would increase private long-term care insurance coverage by 1.1 percentage points. These estimates imply that if every state in the country moved from their current Medicaid asset eligibility requirements to the most stringent Medicaid eligibility requirements allowed by federal law – a change that would decrease average household assets protected by Medicaid by about $25,000 – demand for private long-term care insurance would rise by 2.7 percentage points. While this represents a 30 percent increase in insurance coverage relative to the baseline ownership rate of 9.1 percent, it also indicates that the vast majority of households would still find it unattractive to purchase private insurance. We discuss reasons why, even with extremely stringent eligibility requirements, Medicaid may still exert a large crowd-out effect on demand for private insurance.
    JEL: G22 H51 H53 I18
    Date: 2006–09
  2. By: Nell, Martin; Richter, Andreas; Schiller, Jörg
    Abstract: This paper looks at markets characterized by the fact that the demand side is insured. In these markets a consumer purchases a good to compensate consequen¬ces of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insureds actual expenses, i.e., the insured would be partially or completely reimbursed when purchasing certain goods. In this setting we discuss the interaction between insurance and repair markets by focusing, on the one hand, upon the development of prices and the structure of markets with insured consumers, and, on the other hand, the resulting backlash on optimal insurance contracting. We show that even in the absence of ex post moral hazard the extension of insurance coverage will lead to an increase in prices as well as to a socially undesirable increase in the number of repair service suppliers, if repair markets are imperfect.
    Keywords: insurance; incomplete contracts; repair markets
    JEL: C72 D43 G22
    Date: 2006
  3. By: Rivaud-Danset, Dorothée; Oheix, Valérie
    Abstract: This paper provides a quantitative comparison of the financial patterns of non-financial European firms for seven Continental European countries and the period 1991-2001. Our analytical framework departs from the common one as we consider that long-term and short-term sources of funds have to be analysed separately. Using the BACH database, principal component analysis, cluster analysis and econometrical tests are carried out in order to test for two hypotheses : i) there is a tendency toward grouping around a common corporate financial pattern; ii) there is a general tendency across countries toward less bank financing. We find that differences between European countries remain highly significant so that the first hypothesis is not validated. The second hypothesis is rejected with the long-term intermediation ratio but validated with the short-term one. Indeed, econometrical tests lead to a strong conclusion : the existence of a common trend toward disintermediation of short-term financing. The banking function of allocating liquidity for day-to-day business and providing a certain liquidity insurance to firms is declining whatever the size of firms.
    Keywords: corporate financial structure; BACH database; European convergence; financial intermediation; liquidity insurance.
    JEL: G32
    Date: 2005
  4. By: Kosmas Marinakis (Department of Economics, North Carolina State University); Theofanis Tsoulouhas (Department of Economics, North Carolina State University)
    Abstract: A highly acclaimed result in contract theory is that tournaments are superior to piece rate contracts when the agents are risk averse and their production activities are subject to a relatively large common shock. The reason is that tournaments allow the principal to trade insurance for lower income to the agents. Our analysis shows that this celebrated result does not carry over to the case when a limited liability constraint limits the payments the principal can make, provided that the liquidation value of the firm is sufficiently small. This finding has important implications for the vast number of limited liability firms. Tournaments are still optimal when the liquidation value of the firm is intermediate or large, even though the limited liability constraint is still binding for intermediate values. Surprisingly, uncertainty in the price of output strengthens the need for tournaments by expanding the range of liquidation values over which tournaments are optimal, because price uncertainty introduces additional bankruptcy risk.
    Keywords: piece rate contracts, tournaments, limited liability, bankruptcy, price uncertainty
    JEL: D82 D81
    Date: 2006–03
  5. By: Paul Gordon; Alan E. Woodfield (University of Canterbury)
    Abstract: In addition to penalties imposed for breaches of statutory duties in the event of workplace accidents involving physical harms, New Zealand's Health and Safety in Employment Act 1992 also provides for penalties where accidents have not occurred. Ordinary negligence rules are ex post in that both an accident and harm must occur before liability accrues, whereas ex ante liability rules create liability for deficient care per se. This paper examines whether liability for breaches of duty that do not give rise to accidents have a useful incentive-enhancing role for health and safety decisions by employers in the New Zealand context when used in conjunction with ex post liability rules. We argue that ex post rules by themselves are insufficient to induce appropriate levels of precaution due to the combined presence of weak penalties and considerable uncertainty surrounding the Courts' required standard of care. Merely augmenting ex post liability with ex ante liability, however, is unlikely to induce desirable levels of employer precautions. Further, more strict ex ante standards than socially optimal precaution levels may be desirable since inspection probabilities, prosecution rates, and penalties for breaches of ex ante standards are relatively low, providing some justification for the relatively stringent safety regulations and required standard of care observed in New Zealand. Nevetheless, a weaker but less uncertain standard may instead induce a small degree of overprecaution, removing the need for ex ante regulations from this particular perspective.
    Keywords: ex ante and ex post liability; safety incentives, health and safety standards; uncertainty
    JEL: K32
    Date: 2006–06–01

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