nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒12‒09
seven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. (M)oral Hazard? By Grönqvist, Erik
  2. How Well Does the US Social Insurance System Provide Social Insurance? By Mark Huggett; Juan Carlos Parra
  3. A Dynamic Model of Demand for Private Health Insurance in Ireland By Claire Finn; Colm Harmon
  4. Staying on the Dole By Strulik, Holger; Tyran, Jean-Robert; Vanini, Paolo
  5. A Stochastic Linear Programming Model for Asset Liability Management: The Case of an Indian Insurance Company By Garg Ankur; Tiwari Apoorva; Dutta Goutam; Basu Sankarshan
  6. Optimal Welfare-to-Work Programs By Pavoni, Nicola; Violante, Giovanni L
  7. The Irrelevance of Market Incompleteness for the Price of Aggregate Risk By Krüger, Dirk; Lustig, Hanno

  1. By: Grönqvist, Erik (Dept. of Economics, Stockholm School of Economics)
    Abstract: Would you go to the dentist more often if it were free? Observational data is here used to analyze the impact of full-coverage insurance on dental care utilization using different identification strategies. The challenge of assessing the bite of moral hazard without an experimental study design is to separate it from adverse selection, as agents act on private and generally unobservable information. By utilizing a quasi-experimental feature of the insurance scheme the moral hazard effect is identified on observables, and by having access to an instrument the effect is identified with IV. Moral hazard is assessed using both difference-in-differences and cross-sectional estimations.
    Keywords: Asymmetric information; Moral Hazard; Health Insurance; Porpensity Score Matching; IV
    JEL: D82 G22 I11
    Date: 2006–11–28
  2. By: Mark Huggett; Juan Carlos Parra (Department of Economics, Georgetown University)
    Abstract: This paper answers the question posed in the title within a model where agents receive idiosyncratic, wage-rate shocks that are privately observed. When the model social insurance system is comprised by the US social security and income tax system, then the maximum ex-ante welfare gain to improved insurance is equivalent to a 12.3 percent increase in consumption. We determine the reasons behind this large welfare gain. We also analyze two parametric reforms of the model social insurance system. One reform increases welfare very little, whereas the other achieves nearly all of the maximum possible welfare gain. Classification-JEL Codes: D80, D90, E21
    Keywords: Social Insurance, Social Security, Idiosyncratic Shocks, Private Information
  3. By: Claire Finn (University College Dublin); Colm Harmon (University College Dublin and IZA Bonn)
    Abstract: The Irish health care system offers a tax financed, universal entitlement to public care at a nominal user fee, nonetheless 50% of the Irish population purchase private health insurance. This paper empirically models the propensity to insure as a function of individual and household characteristics using panel data analysis and compares three alternate approaches; a static, chamberlain-mundlak and dynamic specification. Using panel data from 1994 to 2000, we consider whether propensity to insure is in fact a function of heterogeneity or of state dependence. A range of individual and household characteristics is shown to influence propensity to insure. Overall the positive effect of education and income and the negative effect of poor health status remain robust across three specifications. In moving toward a dynamic specification, we show that persistence is a highly significant determinant of demand for private health insurance and also that it reduces the size of the coefficients on the regressors. The latter point highlights that while education, income and, to a lesser extent, health status have very large effects on probability of insuring, these effects are overestimated where no attempt is made to control for unobserved heterogeneity or state dependence.
    Keywords: health insurance, dynamics, panel, unobserved heterogeneity, state dependence
    JEL: G22 I10 D01
    Date: 2006–11
  4. By: Strulik, Holger; Tyran, Jean-Robert; Vanini, Paolo
    Abstract: We develop a simple model of short- and long-term unemployment to study how labour market institutions interact with labour market conditions and personal characteristics of the unemployed. We analyze how the decision to exit unemployment and to mitigate human capital degradation by retraining depends on education, skill degradation, age, labour market tightness, taxes, unemployment insurance benefits and welfare assistance. We extend our analysis by allowing for time-inconsistent choices and demonstrate the possibility of an unemployment trap.
    Keywords: present-biased preferences; retraining; skill degradation; unemployment; unemployment benefits; welfare assistance
    JEL: J31 J38 J64
    Date: 2006–11
  5. By: Garg Ankur; Tiwari Apoorva; Dutta Goutam; Basu Sankarshan
    Abstract: Asset - Liability management is one of the most critical tasks for any financial institution for determining its cushion against the risk and the net returns. The problem of asset liability management for an insurance company requires matching the cash inflows from premium collections and investment income with the cash outflows due to casualty and maturity claims. Thus, what is required is a prudent investment strategy such that the returns earned on the assets match the liability claims at all points of time in future. Conventionally, the asset allocation has been done using the Mean Variance approach due to Markowitz (1952, 1959). While such a strategy ensures that the asset value always match or are greater than the liability for the next year, it does not maximise the net worth of the firm nor does it take care of all the cash inflows and outflows over a long term period. A stochastic linear programming model (on the lines of Pirbhai, 2004) maximises the net worth of the firm and also takes care of the uncertainties. While there are instances of stochastic linear programming being applied for ALM in financial institutions in developed markets, no such practical application has been reported in this area in Indian context as yet. In this paper, we describe the development of a multi stage stochastic linear programming model for insurance companies. The multi-stage stochastic linear programming model was developed on the modelling language AMPL (Fourer, 2002).
    Date: 2006–10–16
  6. By: Pavoni, Nicola; Violante, Giovanni L
    Abstract: A Welfare-to-Work (WTW) program is a mix of government expenditures on various labor market policies targeted to the unemployed (e.g., unemployment insurance, job search monitoring, social assistance, wage subsidies). This paper provides a dynamic principal-agent framework suitable for analyzing chief features of an optimal WTW program such as the sequence and duration of the different policies, the dynamic pattern of payments along the unemployment spell, and the emergence of taxes/subsidies upon re-employment. The optimal program endogenously generates an absorbing policy of last resort ('social assistance') characterized by a constant lifetime payment and no active participation by the agent. Human capital depreciation is a necessary condition for policy transitions to be part of an optimal WTW program. The typical sequence of policies is quite simple: the program starts with standard unemployment insurance, then switches into monitored search and, finally, into social assistance. The optimal benefits are decreasing during unemployment insurance and constant during both job search monitoring and social assistance. Whereas taxes (subsidies) can be either increasing or decreasing with duration during unemployment insurance, they must decrease (increase) during a phase of job search monitoring. In a calibration exercise, we use our model to analyze quantitatively the features of the optimal program for the U.S. economy. With respect to the existing U.S. system, the optimal WTW scheme delivers sizeable welfare gains to unskilled workers because the incentives to search for a job can be retained even while delivering more insurance, and using costly monitoring less intensively.
    Keywords: human capital; job search monitoring; recursive contracts; unemployment insurance; welfare-to-work
    JEL: D82 H21 J24 J64 J65
    Date: 2006–11
  7. By: Krüger, Dirk; Lustig, Hanno
    Abstract: In models with a large number of agents who have constant relative risk aversion (CRRA) preferences, the absence of insurance markets for idiosyncratic labour income risk has no effect on the premium for aggregate risk if the distribution of idiosyncratic risk is independent of aggregate shocks. In spite of the missing markets, a representative agent who consumes aggregate income prices the excess returns on stocks correctly. This result holds regardless of the persistence of idiosyncratic shocks, as long as they are not permanent, even when households face binding, and potentially very tight borrowing constraints. Consequently, in this class of models there is no link between the extent of self-insurance against idiosyncratic income risk and aggregate risk premia.
    Keywords: idiosyncratic income risk; incomplete markets; risk premium
    JEL: G12
    Date: 2006–11

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