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on Insurance Economics |
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Issue of 2010‒01‒23
five papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Arvidsson, Sara (VTI) |
| Abstract: | We empirically investigate the effect of policyholders’ private information of risky traffic behavior on automobile insurance coverage and ex post risk. We combine our insurance company’s information with private information data that is not accessible to the insurance company. We show that being unable to reject the null of zero correlation is not necessarily consistent with symmetric information in the automobile insurance market. Our results are twofold: In contrast to much of the previous work we find a positive significant correlation for three groups of policyholders, consistent with the adverse selection prediction. We furthermore find that private information about risky traffic behavior increases ex post risk while it both increases and decreases the demand for extensive insurance. This supports our hypothesis that adverse and propitious is present simultaneously in this market. |
| Keywords: | Adverse selection; Moral hazard; Propitious selection; Insurance |
| JEL: | D82 |
| Date: | 2010–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:vtiwps:2010_001&r=ias |
| By: | Michael A. Cohen (University of Connecticut); Marina-Selini Katsaiti (University of Connecticut and University of Athens) |
| Abstract: | We present an overlapping-generations (OLG) macroeconomic model that applies a behavioral interpretation of preferences for goods that generate health risks. In this paper proneness to poor health is viewed as a cognitive miscalculation by economic agents between their expected health state over various consumption bundles and the actual health care they require for their health outcome. To model this the paper borrows insight from prospect theory and applies the reference-dependent preference framework to the specication of out utility model. In our model of the economy individual preferences are decomposed into intrinsic consumption utility and gain-loss utility associated with the miscalculation. Agents in the economy are stratied in their health states as well as their expected health care consumption according to some probability measure over the population. Heterogeneity introduced in this way generates consumers of varied proneness to risk associated with consumption of unhealthy goods because individuals have various marginal valuations of their miscalculation. In such a population, when all agents pay the same insurance premium, health-conscious agents shoulder the health care costs of their less health-conscious counterparts and the less health-conscious are engaged in less healthy consumption than they would if they paid actuarially fair premia. We demonstrate these eects in simulations by comparing the risk pooling equilibria to the actuarially fair pricing equilibria. This paper introduces the mathematical programming equilibrium constraint (MPEC) computational approach to compute model equilibria; we believe this approach is new to heterogeneous agent OLG model simulation. |
| Keywords: | Risky Consumption, Health care Cost, Insurance Premia Pricing, Two Sector Model, Obesity. |
| JEL: | I19 E21 O41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2009-43&r=ias |
| By: | Caliendo, Marco (IZA); Tatsiramos, Konstantinos (IZA); Uhlendorff, Arne (University of Mannheim) |
| Abstract: | The generosity of the Unemployment Insurance system (UI) plays a central role for the job search behavior of unemployed individuals. Standard search theory predicts that an increase in UI benefit generosity, either in terms of benefit duration or entitlement, has a negative impact on the job search activities of the unemployed increasing their unemployment duration. Despite the disincentive effect of UI on unemployment duration, UI benefit generosity may also increase job match quality by allowing individuals to wait for better job offers. In this paper we use a sharp discontinuity in the maximum duration of unemployment benefits in Germany, which increases from 12 months to 18 months at the age of 45, to identify the effect of extended benefit duration on unemployment duration and post-unemployment outcomes. We find a spike in the re-employment hazard for the unemployed workers with 12 months benefit duration, which occurs around benefit exhaustion. This leads to lower unemployment duration compared to their counterparts with 18 months benefit duration. However, we also show that those unemployed who obtain jobs close to and after the time when benefits are exhausted are significantly more likely to exit subsequent employment and receive lower wages compared to their counterparts with extended benefit duration. |
| Keywords: | unemployment benefits, unemployment duration, employment probability, job match quality, regression discontinuity |
| JEL: | C41 J64 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4670&r=ias |
| By: | Piero Gottardi (European University Instutite); Atsushi Kajii (Institute of Economic Research, Kyoto University); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University) |
| Abstract: | Should capital and labor be taxed, and if so how when individuals' labor and capital income are subject to uninsurable idiosyncratic risks? In a two period general equilibrium model with production, we first show that reducing investment is welfare improving if households are ho- mogeneous enough ex ante. On the other hand, when the degree of heterogeneity is sufficiently high a welfare improvement is achieved by increasing investment, even if the investment level is already higher than at the e¢ cient allocation obtained when full insurance markets were avail- able. Consequently, the optimal capital tax rate might be negative. We derive a decomposition formula of the effects of the tax which allow us to determine how the sign of optimal tax on capital and labor depends both on the nature of the shocks and the degree of heterogeneity among consumers as well as on the way in which the tax revenue is allocated. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:694&r=ias |
| By: | Syroka, Joanna; Nucifora, Antonio |
| Abstract: | Malawi has experienced several catastrophic droughts over the past few decades. The impact of these shocks has been far reaching, and the resulting macroeconomic instability has been a major constraint to growth and poverty reduction in Malawi. This paper describes a weather risk management tool that has been developed to help the government manage the financial impact of drought-related national maize production shortfalls. The instrument is an index-based weather derivative contract designed to transfer the financial risk of severe and catastrophic national drought that adversely impacts the government's budget to the international risk markets. Because rainfall and maize yields are highly correlated, changes in rainfall -- its timing, cumulative amount, and distribution -- can act as an accurate proxy for maize losses. An index has been constructed using rainfall data from 23 weather stations throughout Malawi and uses daily rainfall as an input to predict maize yields and therefore production throughout the country. The index picks up the well documented historical drought events in 2005, 1995, 1994, and 1992 and a weather derivative contract based on such an index would have triggered timely cash payouts to the government in those years. This innovative risk management instrument was pioneered in 2008/2009 by the Government of Malawi, with the assistance of the World Bank, and was a first for a sovereign entity in Africa. Several piloting seasons will be necessary to understand the scope and limitations of such contracts, and their role in the government's strategy, contingency planning, and operational drought response framework. |
| Keywords: | Debt Markets,Hazard Risk Management,Banks&Banking Reform,Labor Policies,Insurance&Risk Mitigation |
| Date: | 2010–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5169&r=ias |