nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒10‒23
four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Partial Deposit Insurance and Moral Hazard in Banking By Li, Gan; Wen-Yao, Wang
  2. Unemployment Insurance and Job Turnover in Spain By Yolanda Rebollo Sanz
  3. De Finetti on insuring uncertainty By Alberto Feduzzi; Jochen Runde; Carlo Zappia
  4. Safety and the Allocation of Costs in Large Accidents By Langlais, Eric

  1. By: Li, Gan; Wen-Yao, Wang
    Abstract: Abstract: Countries with deposit insurances differ significantly on how much protection their insurance provides. We study the optimal coverage limit in a model of deposit insurance with capital requirements and risk sensitive premia to prevent moral hazard. Depositors have incentives to monitor the bank’s risk taking behavior, thus threatening banks with withdrawals of deposits if necessary. We find that either banking regulations or market discipline is insufficient to reduce bank’s risk. In addition, our numerical example explains the differences in coverage cross countries which agrees with empirical evidence. We show that low income countries provide more generous insurance protection than higher income countries.
    Keywords: Depositor’s monitoring; moral hazard; optimal coverage; partial deposit insurance.
    JEL: E65 G28 G21
    Date: 2010–07–01
  2. By: Yolanda Rebollo Sanz (Department of Economics, Universidad Pablo de Olavide)
    Abstract: The aim of this paper is to shed some light on the potential relationships between the unemployment insurance system and the labour market turnover trying to move further the traditional view that this system has only behavioral consequences from the labour supply side of the labour market. This study assumes heterogeneity in the impact of the incentives embedded in the unemployment insurance system, depending on the type of labour market transition (quits versus layoffs and recalls versus new job entrances) and the worker’s attachment to the labour market (gender and type of contract). The results show that unemployment benefits appear to favour job turnover and firms and workers´s decisions seem to matter on job turnover. The layoff hazard rate increases as workers qualify for unemployment benefits while the quit hazard rate remains stable. Similarly, employment inflow increases sharply after exhaustion of unemployment benefits. The timing and importance of the exit differs between recalls and new job entry and it depends on the worker’s attachment to the labour market. These differences also call into evidence that firm´s and worker´s decisions matter in the duration of unemployment.
    Keywords: Unemployment Insurance, Job Turnover, Multivariate Mix Proportional Hazard Models, Recall and Layoffs, Employment and Unemployment Duration
    JEL: J63 J64 J65
    Date: 2010–10
  3. By: Alberto Feduzzi; Jochen Runde; Carlo Zappia
    Abstract: In the insurance literature it is often argued that private markets can provide insurance against ‘risk’ but not against ‘uncertainties’ in the sense of Knight (1921) or Keynes (1921). This claim is at odds with the standard economic model of risk exchange which, in assuming that decision-makers are always guided by precise point-valued subjective probabilities, predicts that all uncertainties can, in theory, be insured. Supporters of the standard model argue that the insuring of highly idiosyncratic risks by Lloyd’s of London proves that this is so even in practice. The purpose of this paper is to show that Bruno de Finetti, widely regarded as one of the three founding fathers of the subjective approach to probability assumed by the standard model, actually made a theoretical case for uncertainty within the subjectivist approach. We draw on empirical evidence from the practice of underwriters to show how this case may help explain the reluctance of insurers to cover highly uncertain contingencies.
    Keywords: uncertainty, insurance, probability, de Finetti.
    JEL: B23 D80 G22
    Date: 2010–01
  4. By: Langlais, Eric
    Abstract: We study the characteristics of optimal levels of care and distribution of risk in a extended unilateral accident model, where 1/ parties are Rank Dependant Expected Utility maximizers, which allows us to capture two important behavioral characteristics in risk, both pessimism (probability transformation) and risk aversion; 2/ there exists an aggregate/uninsurable risk in case of accident ; 3/ tortfeasors have the opportunity to invest in damages reduction activities having a monetary cost of effort. Important results show that the optimal care is larger than under the risk neutral/small risks case, it depends on the aggregate wealth of society but does not depend on wealth distribution. We then examine whether ordinary liability rules, with or without insurance, can be used to implement the first-best outcome.
    Keywords: K13
    JEL: K13 D02
    Date: 2010–09–30

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