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on Insurance Economics |
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Issue of 2013‒08‒16
five papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Jean-Baptiste Michau (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | This paper investigates the provision of insurance to workers against search-induced wage uctuations. I rely on numerical simulations of a model of on-the-job search and precautionary savings. The model is calibrated to low skilled workers in the U.S.. The extent of insurance is determined by the degree of progressivity of a non-linear transfer schedule. The fundamental trade-off is that a more generous provision of insurance reduces incentives to search for better paying jobs, which is detrimental to the production efficiency of the economy. I show that progressivity raises the search intensity of unemployed worker, which reduces the equilibrium rate of unemployment, but lowers the search intensity of employed job seekers, which results in a lower output level. I also solve numerically for the optimal non-linear transfer schedule. The optimal policy is to provide almost no insurance up to a monthly income level of $1450, such as to preserve incentives to move up the wage ladder, and full insurance above $1650. This policy halves the standard deviation of labor incomes, increases output by 2.4% and generates a consumption-equivalent welfare gain of 1.3%. Forbidding private savings does not fundamentally change the shape of the optimal transfer function, but tilts the optimal policy towards more insurance at the expense of production efficiency. |
| Keywords: | Moral hazard on the job, Optimal social insurance, Progressivity, Search frictions |
| Date: | 2013–08–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00850547&r=ias |
| By: | Daniel McFadden; Carlos Noton; Pau Olivella |
| Abstract: | This expository paper describes the factors that contribute to failure of health insurance markets, and the regulatory mechanisms that have been and can be used to combat these failures. Standardized contracts and creditable coverage mandates are discussed, along with premium support, enrollment mandates, guaranteed issue, and risk adjustment, as remedies for selection-related market damage. An overall conclusion of the paper is that the design and management of creditable coverage mandates are likely to be key determinants of the performance of the health insurance exchanges that are a core provision of the PPACA of 2010. Enrollment mandates, premium subsidies, and risk adjustment can improve the stability and relative efficiency of the exchanges, but with carefully designed creditable coverage mandates are not necessarily critical for their operation. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:302&r=ias |
| By: | Daniel McFadden; Carlos Noton; Pau Olivella |
| Abstract: | We study the consequences of imposing a minimum coverage in an insurance market where enrollment is mandatory and agents have private information on their true risk type. If the regulation is not too stringent, the equilibrium is separating in which a single firm monopolizes the high risks while the rest attract the low risks, all at positive profits. Hence individuals, regardless of their type, "subsidize" insurers. If the legislation is sufficiently stringent the equilibrium is pooling, all firms just break even and low risks subsidize high risks. None of these results require resorting to non-Nash equilibrium notions. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:301&r=ias |
| By: | Hill, Ruth Vargas; Robles, Miguel; Ceballos, Francisco |
| Abstract: | This paper analyzes the demand for rainfall-based weather hedges among farmers in rural India. We explore the predictions of a standard expected utility theory framework on the nature of demand for such products, in particular testing whether demand behaves as predicted with respect to price, the basis of the hedge, and risk aversion using data from a randomized control trial in which price and basis risk was varied for a series of hedging products offered to farmers. We find that demand behaves as predicted, with demand falling with price and basis risk, and appearing hump-shaped in risk aversion. Second, we analyze understanding of and demand for hedging products over time, examining the impact of increased investments in training on hedging products as well as evidence for learning by doing among farmers. We find evidence that suggests that learning by doing is more effective at increasing both understanding and demand. |
| Keywords: | index insurance, Economic theory, expected utility, weather index insurance, Risk, randomized experiment, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:1280&r=ias |
| By: | Lamont Black; Ricardo Correa; Xin Huang; Hao Zhou |
| Abstract: | We propose a hypothetical distress insurance premium (DIP) as a measure of the European banking systemic risk, which integrates the characteristics of bank size, default probability, and interconnectedness. Based on this measure, the systemic risk of European banks reached its height in late 2011 around € 500 billion. We find that the sovereign default spread is the factor driving this heightened risk in the banking sector during the European debt crisis. The methodology can also be used to identify the individual contributions of over 50 major European banks to the systemic risk measure. This approach captures the large contribution of a number of systemically important European banks, but Italian and Spanish banks as a group have notably increased their systemic importance. We also find that bank-specific fundamentals predict the one-year-ahead systemic risk contribution of our sample of banks in an economically meaningful way. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1083&r=ias |