Liquidity Constraints and the Value of Insurance / Keith Marzilli Ericson, Justin R. Sydnor.

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Ericson, Keith Marzilli

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w24993.Publication details: Cambridge, Mass. National Bureau of Economic Research 2018.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Insurance affects the variability of consumption over time, which is not captured in standard expected utility of wealth models. We develop a consumption-utility model that shows how liquidity constraints and borrowing costs impact the value of insurance. Liquidity constraints generate high insurance demand when premiums are due smoothly, sometimes leading to seemingly dominated choices. Conversely, a risk-averse person may value insurance below its expected value and appear risk loving when premiums are due in a single payment. Moreover, optimal insurance contracts take different forms with liquidity constraints. We show empirical insurance analysis using the standard model can generate misleading counterfactuals and welfare estimates. Finally, we demonstrate the model's feasibility and importance with an application to evaluating cost-sharing reductions on the health insurance exchanges.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w24993 (Browse shelf(Opens below))	Not For Loan

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September 2018.

Insurance affects the variability of consumption over time, which is not captured in standard expected utility of wealth models. We develop a consumption-utility model that shows how liquidity constraints and borrowing costs impact the value of insurance. Liquidity constraints generate high insurance demand when premiums are due smoothly, sometimes leading to seemingly dominated choices. Conversely, a risk-averse person may value insurance below its expected value and appear risk loving when premiums are due in a single payment. Moreover, optimal insurance contracts take different forms with liquidity constraints. We show empirical insurance analysis using the standard model can generate misleading counterfactuals and welfare estimates. Finally, we demonstrate the model's feasibility and importance with an application to evaluating cost-sharing reductions on the health insurance exchanges.