nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒10‒27
six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Asset Based Unemployment Insurance By Pontus Rendahl
  2. Employer Health Insurance Mandates and the Risk of Unemployment By Katherine Baicker; Helen Levy
  3. Household Search and Health Insurance Coverage By Matthew Dey; Christopher Flinn
  4. Counterparty Risk in Insurance Contracts: Should the Insured Worry about the Insurer? By James R. Thompson
  5. Risk Exchange as a Market or Production Game By Borglin, Anders; Flåm, Sjur
  6. The Effect of Retirement Incentives on Retirement Behavior: Evidence from the Self-Employed In the United States and England By Julie Zissimopoulos; Nicole Maestas; Lynn A. Karoly

  1. By: Pontus Rendahl
    Abstract: This paper studies a model of optimal redistribution policies in which agents face unemployment risk and in which savings may provide partial self-insurance. Moral hazard arises as job search effort is unobservable. The optimal redistribution policies provide new insights into how an unemployment insurance scheme should be designed: First, the unemployment insurance policy is recursive in an agent's wealth level, and thus independent of the duration of the unemployment spell. Second, the level of benefit payments is negatively related to the agent's asset position. The reason behind the latter result is twofold; in addition to the first-order insurance effect of wealth, an increase in non-labor income (wealth) amplifies the opportunity cost of employment and thus reduces the agent's incentive to search for a job. During unemployment the agent decumulates assets and the sequence of benefit payments is observationally increasing - a result that stands in sharp contrast with previous studies.
    Keywords: Unemployment insurance; Moral hazard; Self-insurance; Decentralized taxes
    JEL: D82 H21 J64 J65
    Date: 2007
  2. By: Katherine Baicker; Helen Levy
    Abstract: Employer health insurance mandates form the basis of many health care reform proposals. Proponents make the case that they will increase insurance, while opponents raise the concern that low-wage workers will see offsetting reductions in their wages and that in the presence of minimum wage laws some of the lowest wage workers will become unemployed. We construct an estimate of the number of workers whose wages are so close to the minimum wage that they cannot be lowered to absorb the cost of health insurance, using detailed data on wages, health insurance, and demographics from the Current Population Survey. We find that 33 percent of uninsured workers earn within $3 of the minimum wage, putting them at risk of unemployment if their employers were required to offer insurance. Assuming an elasticity of employment with respect to minimum wage increase of -0.10, we estimate that 0.2 percent of all full-time workers and 1.4 percent of uninsured full-time workers would lose their jobs because of a health insurance mandate. Workers who would lose their jobs are disproportionately likely to be high school dropouts, minority, and female. This risk of unemployment should be a crucial component in the evaluation of both the effectiveness and distributional implications of these policies relative to alternatives such as tax credits, Medicaid expansions, and individual mandates, and their broader effects on the well-being of low-wage workers.
    JEL: I1 J01
    Date: 2007–10
  3. By: Matthew Dey; Christopher Flinn
    Abstract: Health insurance in the United States is typically acquired through an employer-sponsored program. Often an employee offerred employer-provided health insurance has the option to extend coverage to their spouse and dependents. We investigate the implications of the “publicness” of health insurance coverage for the labor market careers of spouses. The theoretical innovations in the paper are to extend the standard partial-partial equilibrium labor market search model to a multiple searcher setting with the inclusion of multi-attribute job offers, with some of the attributes treated as public goods within the household. The model is estimated using data from the Survey of Income and Program Participation (SIPP) using a Method of Simulated Moments (MSM) estimator. We demonstrate how previous estimates of the marginal willingness to pay (MWP) for health insurance based on cross-sectional linear regression estimators may be seriously biased due to the presence of dynamic selection effects and misspecification of the decision-making unit.
    Keywords: Household Search, Health Insurance Provision, Marginal Willingness to Pay
    JEL: D1 J33 J64
    Date: 2007
  4. By: James R. Thompson (Department of Economics, Queen's University)
    Abstract: We analyze the effect of counterparty risk on insurance contracts using the case of credit risk transfer in banking. In addition to the familiar moral hazard problem caused by the insuree's ability to influence the probability of a claim, this paper uncovers a new moral hazard problem on the other side of the market. We show that the insurer's investment strategy may not be in the best interests of the insuree. The reason for this is that if the insurer believes it is unlikely that a claim will be made, it is advantageous for them to invest in assets which earn higher returns, but may not be readily available if needed. This paper models both of these moral hazard problems in a unified framework. We find that instability in the insurer can create an incentive for the insuree to reveal superior information about the risk of their "investment". In particular, a unique separating equilibrium may exist even in the absence of any signalling device. We extend the model and show that increasing the number of insurers with which the insuree contracts can exacerbate the moral hazard problem and may not decrease counterparty risk. Our research suggests that regulators should be wary of risk being offloaded to other, possibly unstable parties, especially in newer financial markets such as that of credit derivatives.
    Keywords: Counterparty Risk, Moral Hazard, Insurance, Banking, Credit Derivatives
    JEL: G21 G22 D82
    Date: 2007–10
  5. By: Borglin, Anders (Department of Economics, Lund University); Flåm, Sjur (Economics Department, Bergen University;)
    Abstract: Risk exchange is considered here as a cooperative game with transferable utility. The set-up fits markets for insurance, securities and contingent endowments. When convoluted payoff is concave at the aggregate endowment, there is a price-supported core solution. Under variance aversion the latter mirrors the two-fund separation in allocating to each agent some sure holding plus a fraction of the aggregate.
    Keywords: securities; mutual insurance; market or production games; transferable utility; extremal convolution; core solutions; variance or risk aversion; two-fund separation; CAPM
    JEL: C61 G11 G12 G13
    Date: 2007–10–08
  6. By: Julie Zissimopoulos; Nicole Maestas; Lynn A. Karoly
    Abstract: The authors examine how public and private pension and health insurance systems affect retirement transitions. In many countries, public and private pension eligibility, as well as access to health insurance varies between self-employed and wage and salary workers, and these differences are likely to cause differential retirement patterns both within and across countries. They use the variation in these institutional features within and across the United States and England to analyze retirement patterns. Based on longitudinal data from the Health and Retirement Study (HRS) in the United States and the English Longitudinal Survey of Ageing (ELSA) they find that the higher labor force exit rate of wage and salary workers compared to self-employed workers is due to defined benefit pension incentives created by the public and private pension systems. Higher rates of labor force exit at ages 55 and older in England compared to the United States are due in part to the availability of publicly provided health insurance.
    Keywords: retirement, self-employment, health insurance, pensions
    JEL: J26
    Date: 2007–10

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