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

By:

Ericson, Keith Marzilli

Contributor(s):

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):

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

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.

Tags from this library: No tags from this library for this title. Log in to add tags.

Average rating: 0.0 (0 votes)

Holdings
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

Total holds: 0

Collection: Colección NBER Close shelf browser (Hides shelf browser)

Previous	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	Next
Previous	nber w24990 The Impact of the Philadelphia Beverage Tax on Prices and Product Availability /	nber w24991 Monopsony and Employer Mis-optimization Explain Why Wages Bunch at Round Numbers /	nber w24992 Improving Non-Academic Student Outcomes Using Online and Text-Message Coaching /	nber w24993 Liquidity Constraints and the Value of Insurance /	nber w24994 I Don't Know /	nber w24995 Long-term Changes in Married Couples' Labor Supply and Taxes: Evidence from the US and Europe Since the 1980s /	nber w24996 Subways and Urban Growth: Evidence from Earth /	Next

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.