nep-ias New Economics Papers
on Insurance Economics
Issue of 2021‒02‒08
23 papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Public Health Insurance and Medical Spending: Evidence from the ACA Medicaid Expansion By Cortnie Shupe
  2. An Empirical Evaluation On The Effectiveness Of Medicaid Expansion Across 49 States By Tung Yu Marco Chan
  3. Uninsured by choice? A choice experiment on long term care insurance By Akaichi, Faical; Costa-Font, Joan; Frank, Richard
  4. Optimal Social Insurance: Insights from a Continuous-Time Stochastic Setup By João Amador; Pedro G. Rodrigues
  5. How Well Insured are Job Losers? Efficacy of the Public Safety Net. By Chloe N. East; David Simon
  6. Did Covid-19 Cost Trump the Election? By James Lake; Jun Nie
  7. Four Decades of Declining Federal Leadership in the Federal-State Unemployment Insurance Program By Stephen A. Wandner
  8. [Job] Locked and [Un]loaded: The Effect of the Affordable Care Act Dependency Mandate on Reenlistment in the U.S. Army By Michael S. Kofoed; Wyatt J. Frasier
  9. Does Extending Unemployment Benefits Improve Job Quality? Comment By Zhan, Zhaoguo
  10. Does the Healthcare Educational Market Respond to Short-Run Local Demand? By Marcus Dillender; Andrew Friedson; Cong Gian; Kosali Simon
  11. Nigeria's financing of health care during the COVID-19 pandemic: challenges and recommendations By Aregbeshola, Bolaji Samson; Folayan, Morenike Oluwatoyin
  12. Does external medical review reduce disability insurance inflow? By Helge Liebert
  13. Deposit insurance and brokerage firms: impacts on the market discipline of the Brazilian banking industry By Marília Pinheiro Ohlson; Gerlando Augusto Sampaio Franco de Lima; Tony Takeda
  14. Deposit Insurance, Moral Hazard and Bank Risk By Alexei Karas; William Pyle; Koen Schoors
  15. Estimation of future discretionary benefits in traditional life insurance By Florian Gach; Simon Hochgerner
  16. The social determinants of choice quality: evidence from health insurance in the Netherlands By Benjamin Handel; Jonathan Kolstad; Thomas Minten; Johannes Spinnewijn
  17. Looking into the Black Box of “Medical Progress”: Rising Health Expenditures by Illness Type and Age By Friedrich Breyer; Normann Lorenz; Gerald Pruckner; Thomas Schober
  18. Does Ambiguity Generate Demand for Options? By Takashi Nishiwaki
  19. Temporary International Migration, Shocks and Informal Insurance: Analysis Using Panel Data By Chakraborty, Tanika; Pandey, Manish
  20. Bank Lobbying: Regulatory Capture and Beyond By Deniz O Igan; Thomas Lambert
  21. Interconnectedness and Contagion Analysis: A Practical Framework By Jana Bricco; TengTeng Xu
  22. Institutional Corporate Bond Demand By Lorenzo Bretscher; Lukas Schmid; Ishita Sen; Varun Sharma
  23. Strategic default in the international coffee market By Blouin, Arthur; Macchiavello, Rocco

  1. By: Cortnie Shupe
    Abstract: This paper investigates the short-run impact of public insurance expansion under the Affordable Care Act on out-of-pocket medical spending (OOP) and risk exposure among low-income, eligible households as well as the incidence of the cost of providing insurance. Using data from the Medical Expenditures Panel Survey (MEPS), I exploit exogenous variation in Medicaid eligibility rules across states, income groups and time. I find that public insurance eligibility reduced mean OOP by 18.2% among targeted households, but it did not causally increase total expenditures among beneficiaries. Rather, Medicaid expansion shifted the burden of payment from eligible households and private insurance (17% reduction) to taxpayers in the form of public insurance (45.7% increase). The efficiency of these public funds can be summarized by a Marginal Value of Public Funds ranging from 0.06 to 0.59 that is highest for households with at least one pre-existing condition.
    Keywords: public health insurance, risk protection, MVPF, Medicaid, out-of-pocket expenditures, Affordable Care Act
    JEL: D04 D61 H44 I13
    Date: 2021
  2. By: Tung Yu Marco Chan
    Abstract: In 2014 the Patient Protection and Affordable Care Act (ACA) introduced the expansion of Medicaid where states can opt to expand the eligibility for those in need of free health insurance. In this paper, we attempt to assess the effectiveness of Medicaid expansion on health outcomes of state populations using Difference-in-Difference (DD) regressions to seek for causal impacts of expanding Medicaid on health outcomes in 49 states. We find that in the time frame of 2013 to 2016, Medicaid expansion seems to have had no significant impact on the health outcomes of states that have chosen to expand.
    Date: 2020–12
  3. By: Akaichi, Faical; Costa-Font, Joan; Frank, Richard
    Abstract: We examine evidence from two unique discrete choice experiments (DCE) on long term care insurance and values several of its relevant attributes. More specifically, the experiments examine choices made by a large sample made of 15,298 individuals in the United States with and without insurance. We study the valuation of a number of insurance attributes, namely the daily insurance benefit, insurance coverage, the compulsory and voluntary nature of the insurance policy design, alongside the costs (insurance premium) and health requirements. This paper elicits both respondents’ preferences and willingness to pay (WTP) for these care insurance's attributes using a random parameter logit model, and assesses the heterogeneity of choice responses using demographic, socioeconomic and attitudinal motivations to segment response to insurance choices. We find that an increase in the insurance premium by an additional $100 would reduce insurance uptake by 1pp. Insurance policy uptake is higher when it provides benefits for the lifetime (the monthly marginal WTP being $178.64), and voluntary (the monthly marginal WTP increases by an extra $74.71) as opposed to universal, and when it forgoes health checks (the monthly marginal WTP increases by an extra 28US$).
    Keywords: long term care insurance; constrained choices; self-insurance; behavioural constraints; insurance design
    JEL: I18 I31
    Date: 2020–05–01
  4. By: João Amador; Pedro G. Rodrigues
    Abstract: This paper focuses on the determinants of the optimal level of social insurance, thus contributing to explain its cross-country variation. In a continuous-time stochastic endogenous growth setup, it is a form of public insurance against idiosyncratic shocks affecting the income, as well as the dependency ratio of an individual household. Such shocks include, for example, illness, disability, unemployment, or changes in the number of infants and elderly in care. We conclude that a higher average dependency ratio and a higher covariance between technological and dependency shocks both decrease the optimal amount of social insurance. In addition, a higher variance of technological shocks does not affect optimal decisions, while a higher variance of dependency shocks increases optimal social insurance, provided the covariance between technological and dependency shocks is not very negative.
    JEL: C61 H55
    Date: 2021
  5. By: Chloe N. East; David Simon
    Abstract: An extensive literature in economics documents large and persistent declines in earnings following involuntary job loss. We study whether the public safety net mitigates this loss in resources using the Survey of Income and Program Participation in 1996-2013. With an individual fixed effects model, we document which public safety net programs provide the most insurance, and how this varies by pre-job-loss characteristics. We find that Unemployment Insurance provides the largest buffer against lost income, but that due to the structure of the program, the neediest are less-well insured (in terms of dollars transferred and percentage of lost earnings replaced), compared to middle and higher income job losers. This has important implications for the progressivity of the safety net, and how best to support displaced workers, which is crucial to understand for job losers at any time, and especially now, in light of the historic number of job losses during the COVID-19 pandemic.
    JEL: H0 H31 J18 J65
    Date: 2020–12
  6. By: James Lake; Jun Nie
    Abstract: A common narrative is that COVID-19 cost Trump re-election. We do not find supporting evidence; if anything, the pandemic helped Trump. However, we find substantial evidence that voters abandoned Trump in counties with large increases in health insurance coverage since the Affordable Care Act, presumably fearing the roll-back of such expansion. Absent this effect, our estimates imply Trump would been on the precipice of re-election by winning Georgia, Arizona, Nevada, and only losing Wisconsin by a few thousand votes. Finally, while US trade war tariffs boosted Trump’s support, foreign trade war tariffs and US agricultural subsidies had little effect.
    Keywords: 2020 US Presidential election, Covid-19, Affordable Care Act, health insurance coverage, trade war, political economy, trade policy
    JEL: D72 F13 F14 I18
    Date: 2021
  7. By: Stephen A. Wandner (W.E. Upjohn Institute and Urban Institute)
    Abstract: The unemployment insurance (UI) program was established in 1935. Unlike other social insurance programs created by the Social Security Act, it was established as a federal-state program. The federal government initially acted as a strong partner working with state agencies that operate the UI program. Over the past four decades, however, the federal role in the UI program has declined because of reductions in federal resources dedicated to the program and weakening policy leadership and programmatic support. As a result, states operate increasingly divergent UI programs, with many programs providing limited access to the program for experienced unemployed workers who are unemployed through no fault of their own. This paper analyzes the declining role of federal leadership and concludes that it has not been an effective force in maintaining and enhancing a program that should be doing more to ameliorate the effects of economy-wide unemployment and helping individual UI recipients to return to work. If the UI system is going to be effective in the future, especially in future recessions, major strengthening of the UI program is necessary.
    Keywords: unemployment insurance, public policy, intergovernmental relations
    JEL: J65 J68 H7
    Date: 2019–10
  8. By: Michael S. Kofoed (United States Military Academy); Wyatt J. Frasier (United States Army)
    Abstract: One concern with employer-based health insurance is job lock or the inability for employees to leave their current employment for better opportunities for fear of losing benefits. We use the implementation of the Affordable Care Act’s dependency mandate as a natural experiment. Data from the United States Army overcome some limitations in previous studies including the ability to examine workers with fixed contract expiration dates, uniform pay, and health coverage. We find that the ACA decreased reenlistment rates by 3.13 percent for enlisted soldiers aged 23–25. We also find that younger veterans who leave the army are more likely to attend college. These findings show that the ACA reduced job lock and increased college-going.
    Keywords: Affordable Care Act, Job Lock, Military Enlistment, GI Bill
    JEL: I13 J22 H56
    Date: 2019–02
  9. By: Zhan, Zhaoguo
    Abstract: In contrast with a large body of existing literature, Nekoei and Weber (2017, NW henceforth) find a positive effect of unemployment insurance on job quality. This comment shows that NW's finding is driven by unnecessarily large bandwidths used in their regression discontinuity analysis. When the focus is on the data near the cutoff of the regression discontinuity design, the significantly positive effect documented in NW vanishes. Thus, re-examining NW's empirical analysis leads to results that are consistent with, rather than contrary to, many past studies. Our findings indicate the importance of using a range of bandwidths in future studies.
    Keywords: unemployment insurance; job quality; regression discontinuity
    JEL: J31 J64 J65
    Date: 2020–08–15
  10. By: Marcus Dillender (University of Illinois at Chicago); Andrew Friedson (University of Colorado-Denver); Cong Gian (Indiana University); Kosali Simon (Indiana University)
    Abstract: The Patient Protection and Affordable Care Act (ACA) increased demand for healthcare across the U.S., but it is unclear if or how the supply side has responded to meet this demand. In this paper, we take advantage of plausibly exogenous geographical heterogeneity in the ACA in order to examine the response of the healthcare education sector to increased demand for healthcare services. We look across educational fields, types of degrees, and types of institutions; we pay particular attention to settings where our conceptual model predicts heightened responses. We find no statistically significant evidence of increases in graduates and can rule out fairly modest effects. This implies that healthcare production may have adjusted to increased demand from insurance expansion in other ways rather than primarily through new graduates from local healthcare educational markets.
    Keywords: healthcare workforce, demand for schooling, educational pipeline, Affordable Care Act, Medicaid expansion
    JEL: I13 I23 J21
    Date: 2019–08
  11. By: Aregbeshola, Bolaji Samson; Folayan, Morenike Oluwatoyin
    Abstract: An analysis of the financing of Nigeria’s health care system in response to the COVID- 19 pandemic, using three key health care financing indicators: revenue collection, pooling, and purchasing was conducted. Nigeria projected that it would need US$330 million to control its COVID-19 pandemic. However, it raised more than US$560.52 million, of which more than 90% came from the private sector and the donor/philanthropist community. The pooled COVID-19 fund is mainly being expended on temporary public health and clinical care measures, with little invested to strengthen the health system beyond the pandemic. The poor turn-around time for COVID-19 test results and the huge stigma associated with the disease results in most persons with mild to moderate symptoms seeking care from alternatives to the healthcare institutions designated for COVID-19 health care. The huge out-of-pocket expenses, and the inability of most Nigerians to earn money because of measures instituted to contain the pandemic, will likely cause many Nigerians to become economically impoverished by the COVID-19 pandemic. COVID-19-related commodity procurement was least responsive to the needs of those most in need of care and support. The government needs to institute several fiscal policies to improve funding of the health sector. These include taxing of diaspora remittances; swopping debt reduction for domestic investment in health systems; auctioning or sale of emissions permits; trading of Special Drawing Rights; effective collection of corporate and business taxes; and addressing cross-border tax fraud, evasion, and avoidance. Immediate response to ease the financial impact of COVID-19 is inclusion of COVID-19 management in health insurance packages and increase in domestic government health spending to at least 5% of gross domestic product. The long years of neglect of the health system in Nigeria makes it unprepared to meet the demands that COVID-19 has placed on it. Multiple mechanisms for resourcing healthcare are still open to the government of Nigeria. Universal health coverage should be a priority response as a measure to mitigate the impact of COVID-19, especially on the most vulnerable citizens.
    Keywords: Health care financing; COVID-19; Coronavirus; SARS-CoV-2; Disease outbreak; Pandemic; Public health emergency; Health policy; Universal health coverage; Nigeria
    JEL: I10 I18
    Date: 2021–01
  12. By: Helge Liebert
    Abstract: This paper investigates the effects of introducing external medical review for disability insurance (DI) in a system relying on treating physician testimony for eligibility determination. Using a unique policy change and administrative data from Switzerland, I show that medical review reduces DI incidence by 23%. Incidence reductions are closely tied to difficult-to-diagnose conditions, suggesting inaccurate assessments by treating physicians. Due to a partial benefit system, reductions in full benefit awards are partly offset by increases in partial benefits. More intense screening also increases labor market participation. Existing benefit recipients are downgraded and lose part of their benefit income when scheduled medical reviews occur. Back-of-the-envelope calculations indicate that external medical review is highly cost-effective. Under additional assumptions, the results provide a lower bound of the effect on the false positive award error rate.
    Date: 2021–01
  13. By: Marília Pinheiro Ohlson; Gerlando Augusto Sampaio Franco de Lima; Tony Takeda
    Abstract: This study seeks to assess the phenomenon of market discipline in Brazil and analyze whether the increase in deposit insurance coverage in 2013 and the role of brokerage firms in the funding market changed this discipline. The database includes accounting information of Brazilian banks from 2010 to 2017. We calculated the parameters using the Systemic Generalized Method of Moments (GMM-Sys). We found evidence of market discipline through interest rate and maturity of deposits, with the size of banks and their capitalization being the main disciplining factors. Deposit insurance has reduced market discipline for both interest rate and maturity mechanisms, while brokerage firms have reduced the size and capitalization advantages of banks. The results did not indicate the existence of market discipline through the quantity mechanism and deposit insurance did not change this scenario. Brokerage firms also reduced the size and capitalization advantages on this mechanism. However, significant indicators in the market discipline literature, mainly related to banks' credit portfolios, were not relevant in the Brazilian market, indicating discipline might be reinforced. The results were similar in the analysis excluding “too-big-to-fail” banks, with slightly higher parameters, indicating the discipline is stronger for smaller banks.
    Date: 2021–01
  14. By: Alexei Karas; William Pyle; Koen Schoors
    Abstract: Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on variation in the ratio of firm deposits to total household and firm deposits before the announcement of deposit insurance, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which private domestic banks serve as the treatment group and state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control group.
    Keywords: deposit insurance, market discipline, moral hazard, risk taking, banks, Russia
    JEL: G21 G28 P34
    Date: 2021
  15. By: Florian Gach; Simon Hochgerner
    Abstract: In the context of traditional life insurance, the future discretionary benefits ($FDB$), which are a central item for Solvency~II reporting, are generally calculated by computationally expensive Monte Carlo algorithms. We derive analytic formulas for lower and upper bounds for the $FDB$. This yields an estimation interval for the $FDB$, and the average of lower and upper bound is a simple estimator. These formulae are designed for real world applications, and we compare the results to publicly available reporting data.
    Date: 2021–01
  16. By: Benjamin Handel; Jonathan Kolstad; Thomas Minten; Johannes Spinnewijn
    Abstract: Market provision of impure public goods such as insurance, retirement savings and education is common and growing as policy makers seek to offer more choice and gain efficiencies. This approach induces an important trade-off between improved surplus from matching individuals to products and misallocation due to well documented choice errors in these markets. We study this trade-off in the health insurance market in the Netherlands, with a specific focus on misallocation and inequality. We characterize choice quality as a function of predicted health risk and leverage rich administrative data to study how it depends on individual human capital, socioeconomic status and social and information networks. We find that choice quality is low on average, with many people foregoing options that deliver substantive value. We also find a strong choice quality gradient with respect to key socioeconomic variables. Individuals with higher education levels and more analytic degrees or professions make markedly better decisions. Social influence on choices further increases inequality in decision making. Using panel variation in exposure to peers we find strong within firm, location and family impacts on choice quality. Finally, we use our estimates to model the consumer surplus effects of different counterfactual scenarios. While smart default policies could improve welfare substantially, including the choice of a high-deductible option delivers little welfare gain, especially for low-income individuals who make lower quality choices and are in worse health.
    Keywords: Health insurance, the Netherlands, impure public goods
    Date: 2020–10
  17. By: Friedrich Breyer; Normann Lorenz; Gerald Pruckner; Thomas Schober
    Abstract: There is agreement among health economists that on the whole medical innovation causes health care expenditures (HCE) to rise. This paper analyzes for which diagnoses and in which age groups HCE per patient have grown significantly faster than average HCE. We distinguish decedents (patients in their last four years of life) from survivors and use a unique dataset comprising detailed HCE of all members of a regional health insurance fund in Upper Austria for the period 2005-2018. Our results indicate that among decedents in particular the expenditures for treatment of neoplasms have exceeded the general trend in HCE. This confirms that medical progress for this group of diseases has been particularly strong over the last 15 years. For survivors, we find a noticeable growth in cases and cost per case for pregnancies and childbirth and also for treatment of mental and behavioral disorders. The pattern of expenditures over age groups shows that among decedents the younger age groups (below 75) exhibit both the highest HCE per capita and the highest expenditure growth over time. For survivors, we find a steady increase in annual per capita HCE over age in both sexes, but the highest growth rates are observed in the age groups between 20 and 50 years.
    Keywords: health care expenditures.
    JEL: H51 J11 I19
    Date: 2021–01
  18. By: Takashi Nishiwaki (Graduate School of Economics, Waseda University)
    Abstract: This study examinesthe optimal investment strategies for risk-and-ambiguity averse investors and characterizes conditions under which ambiguity induces investors to buy or sell options. Under identical constant relative risk aversion utility functions, we show that ambiguity-averse investors should sell portfolio insurance. In particular, when investors' relative risk aversion is less than or equal to two, ambiguity-averse investors should sell options at any realization values of a reference asset. In addition, if the relative risk aversion is greater than two, we demonstrate that ambiguity-averse investors should sell options at smaller and buy them at higher realization values of the reference portfolio.
    Keywords: Ambiguity; Multiple prior model; Options demand; Kullback-Leibler divergence
    JEL: G11 G22
    Date: 2020–09
  19. By: Chakraborty, Tanika (Indian Institute of Management); Pandey, Manish (University of Winnipeg, Manitoba)
    Abstract: We use panel data for rural Kyrgyzstan to examine households' international migration response when faced with shocks. Using a household fixed effects regression model, we find that while a drought shock increases the likelihood of migration, winter and earthquake shocks reduce the likelihood of migration. We use a simple theoretical framework to illustrate the trade-off between two effects of a shock for a household: loss of income and increase in the need of labor services. We show that migration increases when the former effect of a shock dominates, it reduces when the latter effect dominates. We explore these mechanisms by examining how the migration-response to shocks changes in the presence of alternate coping mechanisms and by evaluating the effect of shocks on a household's decision to send and recall a migrant member. We find that when households have easier access to informal finance the migration-response is muted only for shocks for which the adverse income effect dominates. Our findings also suggest that while shocks for which the loss of income effect dominates have a greater effect on the decision to send a migrant, shocks for which the need of labor services effect dominates only affect the decision to recall a migrant. These findings provide evidence in favor of the proposed mechanisms through which shocks affect temporary migration.
    Keywords: temporary migration, shocks, insurance, informal finance, Asia, Kyrgyzstan
    JEL: J61 O15 O16
    Date: 2021–01
  20. By: Deniz O Igan; Thomas Lambert
    Abstract: In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes. The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis. While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.
    Keywords: Banking;Global financial crisis of 2008-2009;Financial sector;Mortgages;Deposit insurance;WP,bank lobbying,lobbying bank,financial crisis,lobbying expenditure,lobbying agenda,lobbying operation,lobbying process
    Date: 2019–08–09
  21. By: Jana Bricco; TengTeng Xu
    Abstract: The analysis of interconnectedness and contagion is an important part of the financial stability and risk assessment of a country’s financial system. This paper offers detailed and practical guidance on how to conduct a comprehensive analysis of interconnectedness and contagion for a country’s financial system under various circumstances. We survey current approaches at the IMF for analyzing interconnectedness within the interbank, cross-sector and cross-border dimensions through an overview and examples of the data and methodologies used in the Financial Sector Assessment Program. Finally, this paper offers practical advice on how to interpret results and discusses potential financial stability policy recommendations that can be drawn from this type of in-depth analysis.
    Keywords: Financial Sector Assessment Program;Financial contagion;Banking;Systemic risk;Commercial banks;WP,equity index,bank-investment fund interlinkage,Reduce bank exposure,market data,bank-insurance nexus,default threshold,nexus analysis
    Date: 2019–10–11
  22. By: Lorenzo Bretscher (University of Lausanne and Swiss Finance Institute); Lukas Schmid (University of Southern California - Marshall School of Business); Ishita Sen (Harvard University - Harvard Business School); Varun Sharma (London Business School)
    Abstract: We compile a rich dataset that links institutional investors' position level holdings with corporate bond characteristics and estimate demand elasticities with respect to critical sources of risk. Persistence in institutions' holdings provide us with an instrument to isolate exogenous movements in prices. We find significant heterogeneity in demand elasticities across the main players in the corporate bond market, namely insurers, pension funds, and mutual funds. Long-term investors are sensitive to interest rate movements and supply liquidity, whereas mutual funds, with shorter investment horizon and benchmark constraints, demand liquidity. Price impact increased post-crisis for all institutions and has remained higher than the pre-crisis levels, signaling a general decline in bond market liquidity due perhaps to regulatory changes in the corporate bond market. Price impact jumped up significantly during COVID-19, perhaps suggesting a reluctance of dealers to intermediate in the market place, and illustrating that firms' funding opportunities are highly sensitive to investors' latent demand shocks. Our results have wide ranging implications for corporate bond pricing due to heterogeneity in investors and investment mandates, and are hard to reconcile with standard, representative agent based models.
    Keywords: Corporate Bonds, Demand Systems, Insurance Companies, Mutual Funds, Liquidity
    JEL: G11 G12 G21 G22 G23 G24
    Date: 2021–01
  23. By: Blouin, Arthur; Macchiavello, Rocco
    Abstract: This article studies strategic default on forward sale contracts in the international coffee market. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed-price contracts but not on price-indexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk and suppliers have been paid. Estimates suggest that roughly half of the observed defaults are strategic. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. A model calibration suggests that the possibility of strategic default causes 15.8% average losses in output, significant dispersion in the marginal product of capital, and sizable negative externalities on supplying farmers.
    JEL: L14 G32 O16
    Date: 2019–05–01

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