nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒02‒29
thirteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Social insurance with competitive insurance markets and risk misperception By Cremer, Helmuth; Roeder, Kerstin
  2. An employment guarantee as risk insurance? Assessing the effects of the NREGS on agricultural production decisions By Esther Gehrke
  3. The Role of Sickness in the Evaluation of Job Search Assistance and Sanctions By Gerard J. van den Berg; Barbara Hofmann. Arne Uhlendorff
  4. Protecting working-age people with disabilities: experiences of four industrialized nations By Burkhauser, Richard V.; Daly, Mary C.; Ziebarth, Nicolas
  5. Assessing the welfare effects of unemployment benefits using the regression kink design By Camille Landais
  6. Double Moral Hazard and the Energy Efficiency Gap By Louis-Gaëtan Giraudet; Sébastien Houde
  7. Does informal risk sharing induce lower efforts? Evidence from lab-in-the-field experiments in rural Mexico By Alger, Ingela; Juarez, Laura; Juarez-Torres, Miriam; Miquel-Florensa, Josepa
  8. Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates By Mirdala, Rajmund
  9. Can a Bank Run Be Stopped? Government Guarantees and the Run on Continental Illinois By Carlson, Mark A.; Rose, Jonathan D.
  10. Bayesian Dividend Optimization and Finite Time Ruin Probabilities By Gunther Leobacher; Michaela Sz\"olgyenyi; Stefan Thonhauser
  11. Social Protection in APEC: In Pursuit of Inclusive Growth By Cuenca, Janet S.
  12. Religion as an Unemployment Insurance and the Basis of Support for Public Safety Nets: The Case of Latin America and the Caribbean By Camilo Pecha; Inder J. Ruprah
  13. Does Medicaid Coverage for Pregnant Women Affect Prenatal Health Behaviors? By Dave, Dhaval M.; Kaestner, Robert; Wehby, George

  1. By: Cremer, Helmuth; Roeder, Kerstin
    Abstract: This paper considers an economy where individuals differ in productivity and in risk. Rochet (1991) has shown that when private insurance markets offer full coverage at fair rates, social insurance is desirable if and only if risk and productivity are negatively correlated. This condition is usually shown to be satisfied for many health risks, but it appears to be violated for the old age dependency risk (mainly because longevity in turn is positively correlated with productivity). We examine the role of uniform and nonuniform social insurance to supplement a general income tax when neither public nor private insurers can observe individual risk and when it is positively correlated with wages. Consequently, a Rothschild and Stiglitz (1971) equilibrium emerges in the private insurance market and low-wage/low-risk individuals are not fully insured. We show that even when social insurance provided to the poor has a negative incentive effect, it also increases their otherwise insuficient insurance coverage. Social insurance to the rich produces exactly the opposite effects. Whichever of these effects dominates, some social insurance is always desirable. Finally, we introduce risk misperception which exacerbates the failure of private markets. The insurance term now reflects the combined failure brought about by adverse selection and misperception. Now the low-risk individuals are not only underinsured, but also pay a higher than fair rate. However, and rather surprisingly, it turns out that this does not necessarily strengthen the case for public insurance.
    Date: 2016–01
  2. By: Esther Gehrke
    Abstract: This paper assesses the role of risk constraints in households’ production decisions. Using representative panel data for Andhra Pradesh, India, it analyses the effects of the National Rural Employment Guarantee Scheme (NREGS) on households’ crop choices. This paper shows that the introduction of the NREGS reduces households’ uncertainty about future income streams because it provides reliable employment opportunities in rural areas independently of weather shocks and crop failure. Households with access to the NREGS can therefore increase the share of inputs allocated to more profitable but also riskier crops, especially cotton. These shifts in agricultural production can considerably raise the incomes of smallholder farmers. Linking the employment guarantee to risk considerations is the key innovation of this paper. Therewith, it provides empirical evidence of the validity of the theory of decision-making under uncertainty and contributes to the ongoing debate on the effects of the NREGS on agricultural productivity.
    Keywords: uncertainty, employment guarantee, crop choice
    JEL: I38 O12 Q16
    Date: 2014–05
  3. By: Gerard J. van den Berg; Barbara Hofmann. Arne Uhlendorff
    Abstract: Unemployment insurance agencies may combat moral hazard by punishing refusals to apply to assigned vacancies. However, the possibility to report sick creates an additional moral hazard, since during sickness spells, minimum requirements on search behavior do not apply. This reduces the ex-ante threat of sanctions. We analyze the effects of vacancy referrals and sanctions on the unemployment duration and the quality of job matches, in conjunction with the possibility to report sick. We estimate multi-spell duration models with selection on unobserved characteristics. We find that a vacancy referral increases the transition rate into work and that such accepted jobs go along with lower wages. We also find a positive effect of a vacancy referral on the probability of reporting sick. This effect is smaller at high durations, which suggests that the relative attractiveness of vacancy referrals increases over the time spent in unemployment. Overall, around 9% of sickness absence during unemployment is induced by vacancy referrals.
    Keywords: Unemployment, vacancy referrals, physician, wage, unemployment insurance, monitoring, moral hazard
    JEL: J64 J65 C41 C21
    Date: 2016
  4. By: Burkhauser, Richard V. (Cornell University); Daly, Mary C. (Federal Reserve Bank of San Francisco); Ziebarth, Nicolas (Cornell University)
    Abstract: Although industrialized nations have long provided public protection to working-age individuals with disabilities, the form has changed over time. The impetus for change has been multifaceted: rapid growth in program costs; greater awareness that people with impairments are able and willing to work; and increased recognition that protecting the economic security of people with disabilities might best be done by keeping them in the labor market. We describe the evolution of disability programs in four countries: Germany, the Netherlands, Sweden, and the United States. We show how growth in the receipt of publicly provided disability benefits has fluctuated over time and discuss how policy choices played a role. Based on our descriptive comparative analysis we summarize shared experiences that have the potential to benefit policymakers in all countries.
    Date: 2015–06
  5. By: Camille Landais
    Abstract: I show how, in the tradition of the dynamic labor supply literature, one can identify the moral hazard effects and liquidity effects of unemployment insurance (UI ) using variations along the time profile of unemployment benefits. I use this strategy to investigate the anatomy of labor supply responses to UI. I identify the effect of benefit level and potential duration in the regression kink design using kinks in the schedule of benefits in the US. My results suggest that the response of search effort to UI benefits is driven as much by liquidity effects as by moral hazard effects.
    JEL: D82 J22 J65
    Date: 2015
  6. By: Louis-Gaëtan Giraudet (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CNRS - Centre National de la Recherche Scientifique - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - AgroParisTech - AgroParisTech); Sébastien Houde (University of Maryland)
    Abstract: We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We focus on contexts where both the seller and the buyer of an energy saving technology can take hidden actions. For instance, a home retrofit contractor may cut on the quality of installation to save costs, while the homeowner may increase her use of energy service when provided with higher energy efficiency. As a result, neither energy efficiency quality nor energy use are fully contractible. We formalize the double moral hazard problem and discuss how it can help rationalize the energy efficiency gap. We then compare two policy instruments: minimum quality standards and energy-savings insurance. Their relative efficiency depends on the balance between the monitoring costs associated with the former and the deadweight loss of the consumer's action induced by the latter. Calibrating the model to the U.S. retrofit industry, we find that at current market conditions, standards tend to outperform insurance. We also find that the welfare gains from undoing the double moral hazard are substantially larger than those from internalizing carbon dioxide externalities associated with underlying energy use.
    Keywords: Energy efficiency gap, moral hazard, energy-savings insurance, minimum quality standard, credence good, rebound effect.
    Date: 2015–04–30
  7. By: Alger, Ingela; Juarez, Laura; Juarez-Torres, Miriam; Miquel-Florensa, Josepa
    Abstract: How does informal risk sharing affect incentives to avoid risk? While moral hazard is expected under formal insurance, theory suggests that the incentive effects of informal risk sharing are ambiguous: internalization of the external effects of transfers on others may reduce or enhance incentives to avoid risk. To study this issue, which is particularly relevant for developing economies, we designed a novel real-effort lab experiment and conducted it in 16 small villages in rural Mexico. We find that subjects internalize the effects of transfers enough for the presence of transfers to significantly increase effort compared to autarky situations.
    Keywords: informal insurance, effort, moral hazard, free-riding effect, empathy effect
    JEL: C93 D64 O12
    Date: 2016–02
  8. By: Mirdala, Rajmund
    Abstract: Quantitative easing conducted by European central bank to fight persisting risks of deflation is drawing an attention of increasing number of empirical studies. Moreover, effectiveness of monetary policy at near zero inflation rates reveals lot of issues on whether interest rates really have a lower bound around zero percent. As a result, traditional views on the role of inflation expectations and expected real interest rates in the long-term interest rates determination face the challenge of fundamental revision. In the paper we analyze relative contributions of inflation expectations and expected real interest rates to long-term interest rates on government bonds leading path as well as their responses to both types of shocks in the Euro Area member countries using SVAR methodology. We also decompose long-term interest rates into transitory and permanent components. Our research revealed considerable differences in the role of inflation expectations and expected real interest rates shocks in determining long-term interest rates between core and periphery countries of the Euro Area. The crisis period even intensified this trend.
    Keywords: interest rates, inflation expectations, economic crisis, SVAR, variance decomposition, impulse-response function
    JEL: C32 E43 F41
    Date: 2015–09
  9. By: Carlson, Mark A. (; Rose, Jonathan D. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper analyzes the run on Continental Illinois in 1984. We find that the run slowed but did not stop following an extraordinary government intervention, which included the guarantee of all liabilities of the bank and a commitment to provide ongoing liquidity support. Continental's outflows were driven by a broad set of US and foreign financial institutions. These were large, sophisticated creditors with holdings far in excess of the insurance limit. During the initial run, creditors with relatively liquid balance sheets nevertheless withdrew more than other creditors, likely reflecting low tolerance to hold illiquid assets. In addition, smaller and more-distant creditors were more likely to withdraw. In the second and more drawn out phase of the run, institutions with relative large exposures to Continental were more likely to withdraw, reflecting a general unwillingness to have an outsized exposure to a troubled institution even in the absence of credit risk. Finally, we show that the concentration of holdings of Continental's liabilities was a key dynamic in the run and was importantly linked to Continental's systemic importance.
    Keywords: Bank runs; deposit guarantee; deposit insurance; financial crisis
    JEL: G01 G21 H12
    Date: 2016–02–03
  10. By: Gunther Leobacher; Michaela Sz\"olgyenyi; Stefan Thonhauser
    Abstract: We consider the valuation problem of an (insurance) company under partial information. Therefore we use the concept of maximizing discounted future dividend payments. The firm value process is described by a diffusion model with constant and observable volatility and constant but unknown drift parameter. For transforming the problem to a problem with complete information, we derive a suitable filter. The optimal value function is characterized as the unique viscosity solution of the associated Hamilton-Jacobi-Bellman equation. We state a numerical procedure for approximating both the optimal dividend strategy and the corresponding value function. Furthermore, threshold strategies are discussed in some detail. Finally, we calculate the probability of ruin in the uncontrolled and controlled situation.
    Date: 2016–02
  11. By: Cuenca, Janet S.
    Abstract: The paper seeks to take stock of some of the key APEC documents/reports relevant to social protection and safety net programs, and also of the experience of APEC member-economies, with special focus on the Philippines, in implementing social protection measures. In particular, it attempts to identify and analyze social protection issues and challenges within the APEC context. In addition, it aims to provide insights, policy guidelines, and recommendations to improve social protection.
    Keywords: Philippines, APEC, social assistance, social protection, social security, labor market policies, pension, social insurance programs, social safety nets
    Date: 2016
  12. By: Camilo Pecha; Inder J. Ruprah
    Abstract: This paper explores the role of religion in mitigating the degree to which unemployment reduces subjective well-being and it examines its support of social programs. The paper goes beyond existing literature in three ways: It extends existing literature to Latin America and Caribbean countries; it explicitly includes analysis of two confounders (social capital and personal traits) ignored in existing literature; and it moves beyond correlation by using the propensity score method to tease out a causal relation between religion and well-being. We find that religion acts as a buffer: Unemployed religious people are relatively happier than are nonreligious unemployed people. However, in contrast with the existing literature, we find that religious people are relatively more supportive of public social policy.
    Keywords: Social Policy & Protection, Workforce & Employment, life satisfaction, religion, unemployment, insurance
    Date: 2015–06
  13. By: Dave, Dhaval M. (Bentley University); Kaestner, Robert (University of Illinois at Chicago); Wehby, George (University of Iowa, NBER)
    Abstract: Despite plausible mechanisms, little research has evaluated potential changes in health behaviors as a result of the Medicaid expansions of the 1980s and 1990s. In this paper, we provide the first national study of the effects of Medicaid on health behaviors for pregnant women, which is a group of particular interest given evidence of the importance of prenatal health to later life outcomes. We exploit exogenous variation from the Medicaid income eligibility expansions for pregnant women during late-1980s through mid-1990s to examine the effects of these policy changes on smoking, weight gain and other maternal health indicators. We find that the 13 percentage point increase in Medicaid eligibility during the study period was associated with approximately a 3 percent increase in smoking and a small increase in pregnancy weight gain for most of the sample. The increase in smoking, which is a significant cause of poor infant health, may partly explain why Medicaid expansions have not been associated with substantial improvement in infant health.
    Keywords: Medicaid, insurance, moral hazard, health, smoking, weight, prenatal care, infant health
    JEL: D1 H0 I12 I13 I18
    Date: 2016–02

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