nep-ias New Economics Papers
on Insurance Economics
Issue of 2011‒06‒25
five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Child Labor, Idiosyncratic Shocks, and Social Policy By Alice Fabre; Stéphane Pallage
  2. CDS as Insurance: Leaky Lifeboats in Stormy Seas By Stephens, Eric; Thompson, James
  3. A shapley value approach to pricing climate risks By Cooke, Roger M.
  4. Labor supply and government programs: A cross-country analysis By Andrés Erosa; Luisa Fuster; Gueorgui Kambourov
  5. The effect of coinsurance rate on the demand for healthcare: a natural experience in Japan By Galina Besstremyannaya

  1. By: Alice Fabre; Stéphane Pallage
    Abstract: In this paper, we measure the welfare effects of banning child labor in an economy with strong idiosyncratic shocks to employment. We then design two different policies: an unemployment insurance program and a universal basic income system. We show that they can often lead to an endogenous elimination of child labor. We work within a dynamic, general equilibrium model calibrated to South Africa in the 1990s.
    Keywords: Child labor, Idiosyncratic shocks, Unemployment insurance, Universal basic income, Heterogeneous agents, Child labor ban
    JEL: E20 D58 J65
    Date: 2011
  2. By: Stephens, Eric (University of Alberta, Department of Economics); Thompson, James (University of Waterloo, School of Accounting and Business)
    Abstract: In this paper we update the traditional insurance economics framework to incorporate key features of the credit default swap (CDS) market. First, we allow for insurer insolvency, with asymmetric information as to its probability. We find that stable insurers become less stable because they are forced to compete on price. When insurer type is known, increased competition among insurers can create instability for the same reason. Second, we allow the insured party to have heterogeneous motivations for purchasing CDS. For example, some may own the underlying asset and purchase CDS for risk management, while others buy these contracts purely for speculation. We show that speculators will choose to contract with less stable insurers, resulting in higher counterparty risk in this market relative to that of traditional insurance; however, a regulatory policy that disallows speculative trading can, perversely, cause market counterparty risk to increase. Third, we relax the standard assumption of contract exclusivity, which does not apply to the CDS market, by allowing the insured to purchase contracts from many insurers. In contrast to the traditional insurance model, we show that separation of risk type among insured parties can be achieved through insurer choice. We use our model to shed light on the debate over Central Counterparties (CCP). We show that requiring CDS contracts to be negotiated through CCPs can push stable insurers out of the market, mitigating the benefi t of risk pooling.
    Keywords: credit default swaps; insurance; counterparty risk; banking; regulation
    JEL: D82 G18 G21 G22
    Date: 2011–06–16
  3. By: Cooke, Roger M.
    Abstract: This paper prices the risk of climate change by calculating a lower bound for the price of a virtual insurance policy against climate risks associated with the business as usual (BAU) emissions path. In analogy with ordinary insurance pricing, this price depends on the current risk to which society is exposed on the BAU emissions path and on a second emissions path reflecting risks that society is willing to take. The difference in expected damages on these two paths is the price which a risk neutral insurer would charge for the risk swap excluding transaction costs and profits, and it is also a lower bound on society's willingness to pay for this swap. The price is computed by (1) identifying a probabilistic risk constraint that society accepts, (2) computing an optimal emissions path satisfying that constraint using an abatement cost function, (3) computing the extra expected damages from the business as usual path, above those of the risk constrained path, and (4) apportioning those excess damages over the emissions per ton in the various time periods. The calculations follow the 2010 US government social cost of carbon analysis, and are done with DICE2009. --
    Keywords: Climate change,insurance premium,Shapley value,DICE
    JEL: C71 Q54
    Date: 2011
  4. By: Andrés Erosa (IMDEA Social Sciences Institute); Luisa Fuster (IMDEA Social Sciences Institute); Gueorgui Kambourov (University of Toronto)
    Abstract: There are substantial cross-country differences in labor supply late in the life cycle (age 50+). A theory of labor supply and retirement decisions is developed to quantitatively assess the role of social security, disability insurance, and taxation for understanding differences in labor supply late in the life cycle across European countries and the United States. The findings support the view that government policies can go a long way towards accounting for the low labor supply late in the life cycle in the European countries relatively to the United States, with social security rules accounting for the bulk of these effects.
    Keywords: social security; disability insurance; labor supply; heterogeneity; life cycle
    JEL: D9 E2 E6 H2 H3 H5 J2
    Date: 2011–06–16
  5. By: Galina Besstremyannaya (CEFIR)
    Abstract: The paper measures the effect of coinsurance rate on the demand for healthcare in Japan. We construct the control group of consumers and estimate the average treatment effect of the April 2003 rise in coinsurance rate of heads of households on their healthcare expenditure. Another approach assesses the impact of the nominal coinsurance rate on the probability of having healthcare expenditure. Individual heterogeneity is exploited with the help of a latent class model. The analysis employs the 2000-2006 data of the Japanese Panel Survey of Consumers. The estimations demonstrated a negative and significant effect of the coinsurance rate on the demand for healthcare. The elasticity of total healthcare expenditure with respect to nominal coinsurance rate was -0.51. The rise in nominal coinsurance rate from 20% to 30% decreased the probability of having healthcare expenditure by 4.2%. The estimates justify the reliance on coinsurance rate as an instrument to contain costs in Japanese health insurance system. Yet, enhancing the efficiency of healthcare provision may offer alternative means to dealing with the burden of healthcare costs in Japan.
    Keywords: healthcare demand, social health insurance, coinsurance rate, price elasticity
    JEL: I10 I18 G22 R22
    Date: 2011–05

This nep-ias issue is ©2011 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.