TY  - BOOK
AU  - Ericson,Keith Marzilli
AU  - Sydnor,Justin R.
ED  - National Bureau of Economic Research.
TI  - Liquidity Constraints and the Value of Insurance
T2  - NBER working paper series
PY  - 2018///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - September 2018; Hardcopy version available to institutional subscribers
N2  - 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
UR  - https://www.nber.org/papers/w24993
UR  - http://dx.doi.org/10.3386/w24993
ER  -