testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

financial wealth consumption smoothing and income shocks arising from job loss one of the reasons for setting up an unemployment insurance scheme is to allow job losers to smooth consumption we test for the impact of unemployment benefits on changes in household food expenditure of individuals who have recently experienced a job loss we also study the relationship between unemployment benefits and the financial wealth of the unemployed from our empirical analysis we conclude that for households without financial wealth at the time of job loss unemployment benefits help to smooth food consumption for households running debt before job loss there is evidence that lower replacement rates lead to a postponement of debt repayment

claim timing and ex post adverse selection many health care treatments are not urgent and may be delayed if patients so choose because insurance coverage is typically determined by the treatment date individuals may have incentives to strategically delay treatments to minimize out of pocket costs the strategic delay of treatment a particular form of moral hazard can be an important source of subsequent adverse selection in which ex ante identical individuals select insurance coverage based on their differing accumulation of previously delayed treatments this article investigates these forces empirically in the context of the missing market for dental insurance using rich claim level data my analysis reveals that approximately 40 of individuals strategically delay dental treatments when incentivized to do so and this flexibility in delaying treatment can explain why the market for dental insurance has largely unraveled more generally the counterfactual analysis suggests features such as open enrolment periods and contracting on pre existing conditions may be helpful tools in overcoming adverse selection in insurance contexts where the timing of uncertainty is not contractible

a note on unionization and the elasticity of substitution if unions force employers off their demand curves the measured elasticity of substitutio n should be lower where unionization is stronger estimates based on pooled data for twenty two digit sic canadian manufacturing industrie s over the period 1971 81 support this proposition point estimates a re that the elasticity is 1 98 in the absence of unions 1 04 if empl oyees are fifty percent unionized and only 0 10 if employees are one hundred percent unionized however the results are not very robust to specification changes

unemployment risk and precautionary wealth evidence from households balance sheets this paper examines precautionary behavior by relating job loss risk to household net worth we use existing best practice and some new strategies to deal with some problematic issues inherent in this literature regarding proxying uncertainty instrumentation and incorporating theoretical restrictions we do not find precautionary variation in the wealth holdings of households with low permanent income but do find precautionary effects for moderate and higher income households when the dependent variable is total net worth these findings are robust to several alternative specifications but we do not find precautionary responses in subaggregates of wealth that exclude home equity

consumption in the shadow of unemployment abstract by how much do employed households reduce their consumption when the aggregate unemployment rate rises in spain during the great recession a one point increase in the unemployment rate was related to a strong reduction in household consumption of more than 0 7 per equivalent adult this reduction is consistent with forward looking agents responding to downward revisions of their expectations on future income growth rates the shadow of unemployment using consumption panel data that include information on physical quantities we show that the drop in consumption expenditure was truly a reduction in quantities and not a switch to cheaper alternatives

factor substitution average firm size and economic growth this paper extends the lucas 1978 the bell journal of economics 9 2 508 523 analysis of firm size by taking into account a normalised aggregate ces production function in a general equilibrium framework it is proved that there is an inverse relation between the elasticity of substitution and average firm size if interpreted together with the fact that richer countries are characterised by a higher elasticity of substitution this result can explain why the recent literature finds a positive association between the importance of smes in an economy and its stage of development but seems to fail in finding causality between the two both have a common origin a high value of the elasticity of substitution this paper also provides a first empirical test of the theory proposed using cross country data from both developed and developing countries

how important is precautionary saving we estimate how much of the wealth of a sample of psid respondents is held because some households face more income uncertainty than others we begin by solving a theoretical model of saving which we use to develop appropriate measures of uncertainty we then regress measures of wealth on our measures of uncertainty and find evidence that households engage in precautionary saving finally we simulate the wealth distribution that our empirical results imply would prevail if all households had the same uncertainty as the lowest uncertainty group we find that between 39 and 46 percent of wealth in our sample is attributable to the extra uncertainty that some consumers face compared to the lowest uncertainty group

consumption smoothing and debtor protections abstract protections for defaulting debtors are a widely used form of consumption insurance this paper evaluates the costs and benefits of this insurance both inside and outside of bankruptcy first i show that consumption declines by 6 upon default revealing a potential role for greater debtor protections to smooth consumption second i use changes in states laws to estimate the impact of one type of debtor protection asset exemptions on repayment in default and interest rates while higher exemptions smooth consumption by reducing collection in default the interest rate cost is large relative to the benefits adapting a sufficient statistics formula from the literature the estimates imply that the cost of additional exemption protection exceeds what debtors are willing to pay

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

ces production functions and economic growth we examine inconsistencies and controversies related to the use of ces production functions in growth models first we show that not all variants of ces functions commonly used are consistently specified second using a simple growth model we find that a higher elasticity of substitution leads to a higher steady state and makes the emergence of permanent growth more probable it is also pointed out that the effect of a higher elasticity of substitution on the speed of convergence depends on the relative scarcity of the factors of production finally we discuss possible explanations of variations in the elasticity of substitution jel classification o41 o11

unemployment insurance and precautionary saving abstract models of precautionary saving imply that households will hold more assets when faced with greater income uncertainty however previous empirical studies of income uncertainty have produced somewhat mixed support for the precautionary saving hypothesis in this paper we note that differences in the state contingent income stream available to workers through the unemployment insurance ui program provides an excellent source of variation for testing the presence of a precautionary savings motive simulations of a stochastic life cycle model suggest that a ui system similar to the type currently in place in the u s can lead to a significant reduction in the assets accumulated by a median worker moreover there is considerable variation in the ui benefit schedules for workers living in different states in the u s which provides an exogenous source of variation for empirically testing the precautionary saving hypothesis we carry out this test using data on expected ui benefit replacement rates and financial assets held by households in the survey of income and program participation our empirical results are consistent with the predictions of the model and suggest that reducing the ui benefit replacement rate by 50 percent would increase gross financial asset holdings by 14 percent or 241 for the average worker we also find empirical evidence that this crowd out effect of ui on household saving is stronger for those facing higher unemployment risk and weaker for older workers both of which are implications from our precautionary saving model

preference heterogeneity and insurance markets explaining a puzzle of insurance the textbook approach to insurance markets emphasizes the role of private information about risk in determining who purchases insurance in the classic adverse selection model of michael rothschild and joseph stiglitz 1976 individu als with higher expected claims buy more insur ance than those with lower expected claims who may be out of the market entirely this basic prediction of asymmetric information models of a positive correlation between insurance cov erage and accident occurrence has been shown to be robust to a variety of extensions to the stan

consumer confidence and rational expectations are agents beliefs consistent with the theory consumer confidence is found to have predictive content for a wide range of macroeconomic variables including consumption growth contrary to standard repih we find that on uk data the repih is rejected due to the predictive content of consumer confidence and not labour income we explain this finding in terms of precautionary behaviour extending the hansen and singleton consumption capm model to allow a conditional variance we find a high level of confidence is associated with both greater optimism about the level of consumption and greater uncertainty about the forecaster variance once allowance is made for time aggregation the over identifying restrictions implied by this model are accepted we estimate a small but statistically significant intertemporal elasticity of substitution

the usefulness of consumer confidence in forecasting household spending in canada a national and regional analysis i introduction in 1960 the conference board of canada launched its series of quarterly surveys of consumer attitudes since then the results of these surveys have provided policy makers economic forecasters and business managers with useful information on future economic trends the increasing demand for the survey results both by the public and the business sectors as well as the expanding coverage given to them in the media appear to confirm their popularity and usefulness to better gauge consumer sentiment the conference board of canada also designed the index of consumer attitudes ica for the entire nation as well as for the five canadian regions the atlantic provinces quebec ontario the prairies and british columbia 1 the ica is derived from answers to four attitudinal questions contained in the survey of consumer attitudes because two of these four questions relate to the respondent family s economic prospects over the next six months and to the employment prospects for the community over the next six months the index is widely thought to reflect consumer expectations with respect to future economic conditions which in turn would influence consumption behavior a number of empirical studies have investigated the effectiveness of indices of consumer confidence as leading indicators of consumer spending in canada an early paper by shapiro and angevine 1969 finds that the composite index of consumer mood derived from the financial post s quarterly survey of consumer buying intentions is a very useful tool for predicting consumer spending on durable goods 2 in a follow up study angevine 1974 also finds that measures of consumer mood based on the financial post s survey are statistically significant explanatory variables for three consumption categories nondurable goods semidurable goods and services rayfuse 1982 reports that consumer sentiment as captured by the ica tends to lead movements in consumer expenditures on durable goods by one quarter 3 more recently cote and johnson 1998 examine whether the ica improves the fit of a consumption equation that includes other macroeconomic variables they find that inclusion of the ica improves the explained variation in growth in consumer expenditures per capita by 18 percentage points 4 the purpose of our article is to provide a fresh empirical perspective on the effect of consumer confidence on household spending in canada although past studies confine their attention to national data the present investigation examines the ability of the ica as well as the individual attitudinal questions used in the survey to forecast canadian household spending not only nationwide but also at a regional level to our knowledge our study represents the first endeavor in the literature to assess the usefulness of regional consumer confidence indices in forecasting household spending our work also employs significantly extended time series for the various components of consumer expenditure used in previous canadian studies employing the results of the conference board of canada s survey of consumer attitudes for the sample period 1979q4 2001q4 our empirical findings indicate that at the national level the ica is a reliable predictor of total personal consumption expenditures as well as of various subcategories of consumer spending in the presence of control variables on the other hand our regional results are quite diverse suggesting that economic fore casters and government policy makers should be cautious about using regional confidence indicators to predict consumption growth the remainder of this article is structured as follows section ii describes the four attitudinal questions used in the construction of the ica at both the national and the regional levels section iii discusses the econometric methodology and the data employed in our empirical analysis section iv reports the correlations between growth in total personal consumption expenditures pce and the contemporaneous ica as well as the different lags of the ica

does firm growth increase corruption evidence from an instrumental variable approach prior literature on the role that firm heterogeneity plays in corruption finds that larger firms pay smaller bribes and are less likely to pay bribes than smaller firms these studies however often overlook the plausible reverse causality between firm growth or firm size and corruption utilizing an innovative identification strategy that accounts for this source of endogeneity this study finds that increased firm size actually causes greater corruption and bureaucratic burdens on a typical firm and provides evidence against the argument for a uniform corruption burden regardless of size it was determined that a one standard deviation increase in sales leads to 0 33 standard deviation increase in bribes and to 0 36 standard deviation increase in management time spent dealing with public officials moreover although corruption burden increases with increasing firm size we find that this relationship is non linear and diminishes in magnitude as firm size approaches to medium and large we conclude with implications and policy considerations

pricing and welfare in health plan choice premiums in health insurance markets frequently do not reflect individual differences in costs either because consumers have private information or because prices are not risk rated this creates inefficiencies when consumers self select into plans we develop a simple econometric model to study this problem and estimate it using data on small employers we find a welfare loss of 2 11 percent of coverage costs compared to what is feasible with risk rating only about one quarter of this is due to inefficiently chosen uniform contribution levels we also investigate the reclassification risk created by risk rating individual incremental premiums finding only a modest welfare cost

unemployed but optimistic optimal insurance design with biased beliefs biased perceptions of risks change the perceived value of insurance and the per ceived returns to avoiding these risks i show empirically that unemployed workers overestimate how quickly they will nd work but underestimate the return to their search eorts i analyze the consequences for the optimal design of unemployment insurance with biased beliefs contracts equalizing the marginal smoothing ben e t and the moral hazard cost of insurance are suboptimal social and private insurance diverge a paternalistic social planner corrects the moral hazard cost for the distortion in the insured s eort choice while private insurers focus on the perceived rather than the true smoothing bene ts when unemployed workers are optimistic privatizing unemployment insurance may result in ine ciently low or rapidly decreasing unemployment bene ts

productivity gains from unemployment insurance this paper argues that unemployment insurance increases labor productivity by encouraging workers to seek higher productivity jobs and by encouraging rms to create those jobs we use a quantitative model to investigate whether this eect is comparable in magnitude to the standard moral hazard eects of unemployment insurance our model economy captures the behavior of the u s labor market for high school graduates quite well with unemployment insurance more generous than the current u s level unemployment would increase by a magnitude similar to the micro estimates but because the composition of jobs also changes total output and welfare would increase as well

unemployment wage bargaining and capital labour substitution many economists believe that capital accumulation technical progress and labour force expansion have no lasting effect on unemployment this view rests on the empirically doubtful assumption that the elasticity of substitution between labour and capital is equal to unity i e production is cobb douglas using a simple model based on the work of layard nickell and jackman this paper demonstrates that with a lower elasticity of substitution the equilibrium unemployment rate is affected by all of the above factors it considers briefly how capital accumulation may be endogenised and what long run implications this has for unemployment copyright 1999 by oxford university press

multiple dimensions of private information evidence from the long term care insurance market we demonstrate the existence of multiple dimensions of private information in the long term care insurance market two types of people purchase insurance individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance ex post the former are higher risk than insurance companies expect while the latter are lower risk in aggregate those with more insurance are not higher risk our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence the results also suggest a general test for asymmetric information

precautionary saving and subjective earnings variance abstract in this paper i examine a model of precautionary saving and i show that the fact that people may insure against income risk makes it difficult to evaluate the extent of precautionary accumulation by simply looking at the relationship between wealth and earnings variance i also argue that occupations may represent a bad proxy for income risk

advantageous selection in insurance markets this article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision risk tolerant individuals take few precautions and are disinclined to insure but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer more risk averse types taxing insurance drives out the reckless clients allowing a strict pareto gain this result depends on administrative costs in processing claims and issuing policies as does the novel finding of a pure strategy partial pooling subgame perfect nash equilibrium in the insurance market copyright 2001 by the rand corporation

economic growth and the elasticity of substitution two theorems and some suggestions at the beginning of the twentieth century the work of the swedish economist knut wicksell 1901 marked an important advance in our understanding of the relationship between the structure of production functions and income distribution wicksell had asked the following question among many others suppose that the marginal productivities are equal to the remuneration rates of each factor what then should be the form of the corresponding production function he pointed out p 125 that the general integral of the partial differential equation implied by this relationship was of the form y lf kil which meant in turn that the product y was necessarily a homogeneous of degree one function of capital k and labor l as an example he gave a function where the shares of k and l in y were constant and wrote down the function which would be rediscovered decades later by charles w cobb and paul h douglas 1928 however it is only half a century later in robert m solow s nobel prize winning 1956 essay that implications between the structure of the production function and long run equilibrium or disequilibrium of the economy were drawn in his classic article a contribution to the theory of economic growth solow had considered three cases analytically other cases were also discussed geometrically using a phase diagram he had labeled the two first cases 1hlarrod domar and cobb douglas respectively and he referred to the third type of production function as offering a bit of variety it was y ak 2 l 2 2 a particular case of y akp lp 1p in those early days solow had not pointed out to the reader that his cases could have been numbered 0 1 and 2 following the elasticity of substitution of the corresponding production function it would be only five years later in 1961 that with his coauthors kenneth j arrow et al he would find the general form of the two factor constant elasticity of substitution ces production function by integrating the differential equation corresponding to the observed relationship between output per capita and the wage rate solow s third case was indeed highly interesting since it allowed the possibility of everincreasing income per head even without any technical progress indeed solow showed that due to the efficiency of the system entailed by the particular production function he had chosen there existed a threshold for the savings rates s to generate investment per head large enough for income per head to grow forever that threshold was s nla2 where n is the growth rate of the population it was then natural to ask whether one could express that threshold in terms of the elasticity of substitution a the value of that threshold was determined by de la grandville 1989 to be equal to s no3 or where a is k s coefficient in a normalized ces function equal to a in solow s third case where u 2 for any s and n values this relationship gives also the threshold value in implicit form by the solution of ao1 1 log 3q or ilog nls by totally differentiating the last relationship one could observe that the threshold for the elasticity of substitution to entail ever sustained growth was an in klump faculty of mathematics and economics university of ulm helmholtzstrasse 20 d 89081 ulm germany de la grandville department of economics university of geneva 102 boulevard carl vogt ch 1211 geneva 4 switzerland we gratefully acknowledge the comments of seminar participants at stanford university and at the universities of stuttgart hohenheim and munich where parts of the paper were presented also we would like to thank without implicating in any way robert solow for his insightful remarks and an anonymous referee for very helnfuil supgestions wicksell cobb and douglas would no doubt burst with pride if they knew that one of our first year students wrote in a paper of his of course we recognize here a kirk douglas production function

consumption versus expenditure previous authors have documented a dramatic decline in food expenditures at the time of retirement we show that this is matched by an equally dramatic rise in time spent shopping for and preparing meals using a novel data set that collects detailed food diaries for a large cross section of u s households we show that neither the quality nor the quantity of food intake deteriorates with retirement status we also show that unemployed households experience a decline in food expenditure and food consumption commensurate with the impact of job displacement on permanent income these results highlight how direct measures of consumption distinguish between anticipated and unanticipated shocks to income whereas measures of expenditures obscure the distinction

does customer satisfaction have directional predictability for u s discretionary spending abstractresearch indicates that past growth in customer satisfaction is an important factor in explaining the in sample behaviour of growth in discretionary spending motivated by such evidence we take an out of sample forecasting approach to examine whether customer satisfaction has directional predictability for two types of discretionary spending these include spending on motor vehicles and spending on recreation services which display frequent negative growth for the period 1995 2015 our results indicate that customer satisfaction accurately predicts the direction of change in both types of spending under symmetric loss to augment we further show that the widely reported consumer sentiment has no directional predictability for either types of discretionary spending

mispriced equity regulated rates for auto insurance in massachusetts from the santa monica freeway to the new jersey turnpike drivers are unhappy about the cost of automobile insurance and are asking government to do something about it california voters approved proposition 103 in 1988 it requires that all rates be approved by the state insurance commissioner attempts to reduce rates by 20 percent and dramatically limits the criteria that can be used to rate drivers for premium purposes new jersey enacted an insurance reform law that seeks to charge insurers for a deficit burdened state underwriting pool and prohibits the use of age sex and marital status in rating drivers for premiums other states enacting or considering significant rate rollbacks or reform since 1988 include arizona florida michigan nevada and pennsylvania this article describes the current consequences of similar policies adopted in massachusetts more than a decade ago the experience suggests that recent moves by other states in the same direction will ultimately prove quite expensive as the proportion of high cost drivers increases and as insurers lose the incentive to write policies and control costs the trend away from insurance premiums based on expected cost also reduces incentive effects for drivers since insurance premiums provide a link between tort judgments and consumer decisions

can consumer attitudes forecast household spending in the united states further evidence from the michigan survey of consumers 1 introductionfor many years indices of consumer sentiment have been used to provide government policy makers economic forecasters and business managers with timely and important information on consumer attitudes this interest in consumer attitudes reflects a widespread belief that the sentiments and expectations of individual consumers directly affect the direction of the u s economy reinforcing this belief is the fact that consumer spending accounts for about two thirds of the nation s gross domestic product gdp thus far most analyses of consumer attitudes as a leading indicator of household spending have focused primarily on the predictive power of the michigan index of consumer sentiment ics the results of these studies have however been mixed for example an early study by lovell 1975 finds that measures of consumer attitudes based on the michigan survey of consumers are unreliable predictors of future consumption 1 mishkin 1978 using a stock adjustment model shows that the ics provides good explanatory power for changes in consumer durables carroll fuhrer and wilcox 1994 henceforth cfw find that the michigan index has some incremental predictive power as regards forecasting household spending souleles 2001 using the microdata of the michigan survey reports that consumer sentiment is useful in forecasting future consumption even when controlling for a number of macroeconomic variables on the other hand howrey 2001 finds that both lagged and current quarter monthly values of the ics are generally insignificant when control variables are present in the equations of total personal consumption expenditures pce consumer spending on durable goods as well as on services lovell 2001 recently suggests that the index of consumer expectations ice developed by the university of michigan may be a better proxy for consumer confidence than the ics this is because the ice is derived solely from a subset of forward looking questions in contrast to the ics which is based on both forward looking questions and current conditions questions 2 in view of lovell s 2001 insightful suggestion the main objective of this article is to empirically examine the predictive power of the ice in forecasting u s consumption growth moreover it would be useful to compare the informational content of the ice and the ics to determine whether indices of consumer confidence reflect consumers perception of future economic conditions in this article we use the reduced form equation given in cfw 1994 to examine the forecasting ability of the ice and the ics our empirical results indicate that the lagged values of the ice predict changes in total pce much better than those of the ics furthermore when tested separately in the reduced form equation the forward looking questions are generally significant suggesting that they contain valuable information about consumers expectations of future economic outlook we also extend our analysis to the study by cfw 1994 the results of this analysis confirm the view that the ice has greater incremental predictive power than the ics the remainder of this article is structured as follows section 2 describes the five core questions used in the michigan surveys of consumers section 3 discusses the econometric methodology and data section 4 reports our main empirical results section 5 is a case study based on cfw s 1994 data set section 6 presents some conclusions 2 the michigan surveys of consumersthe ics produced by the michigan surveys of consumers is derived from the following five core questions 3qfpr financial position realization we are interested in how people are getting along financially these days would you say that you and your family living there are better off or worse off financially than you were a year ago qdurs durables purchases

health insurance and the demand for medical care evidence from a randomized experiment we estimate how cost sharing the portion of the bill the patient pays affects the demand for medical services the data come from a randomized experiment a catastrophic insurance plan reduces expenditures 31 percent relative to zero out of pocket price the price elasticity is approximately 0 2 we reject the hypothesis that less favorable coverage of outpatient services increases total expenditure for example by deterring preventive care or inducing hospitalization

consumption sentiment and economic news this paper investigates the influence of economic news on consumer sentiment and examines whether news shocks changes in coverage that would not be expected from incoming data on economic fundamentals have aggregate effects using monthly u s data and a structural vector autoregression i find that 1 sentiment is affected by news shocks 2 after filtering out effects of news shocks shocks to sentiment still have positive effects on consumer spending and 3 news shocks influence both spending and unemployment in significant though transitory ways these results are consistent with other evidence of a role of nonfundamental factors in aggregate fluctuations jel e21 e32 d12

knowledge of future job loss and implications for unemployment insurance this paper studies the implications of individuals knowledge of future job loss for the existence of an unemployment insurance ui market learning about job loss leads to consumption decreases and spousal labor supply increases this suggests existing willingness to pay estimates for ui understate its value but it yields new estimation methodologies that account for and exploit responses to learning about future job loss although the new willingness to pay estimates exceed previous estimates i estimate much larger frictions imposed by private information this suggests privately traded ui policies would be too adversely selected to be profitable at any price

private information and insurance rejections across a wide set of nongroup insurance markets applicants are rejected based on observable often high risk characteristics this paper argues that private information held by the potential applicant pool explains rejections i formulate this argument by developing and testing a model in which agents may have private information about their risk i first derive a new no trade result that theoretically explains how private information could cause rejections i then develop a new empirical methodology to test whether this no trade condition can explain rejections the methodology uses subjective probability elicitations as noisy measures of agents beliefs i apply this approach to three nongroup markets long term care disability and life insurance consistent with the predictions of the theory in all three settings i find significant amounts of private information held by those who would be rejected i find generally more private information for those who would be rejected relative to those who can purchase insurance and i show it is enough private information to explain a complete absence of trade for those who would be rejected the results suggest that private information prevents the existence of large segments of these three major insurance markets publication abstract

moral hazard vs liquidity and optimal unemployment insurance this paper presents new evidence on why unemployment insurance ui benefits affect search behavior and develops a simple method of calculating the welfare gains from ui using this evidence i show that 60 percent of the increase in unemployment durations caused by ui benefits is due to a liquidity effect rather than distortions on marginal incentives to search moral hazard by combining two empirical strategies first i find that increases in benefits have much larger effects on durations for liquidity constrained households second lump sum severance payments increase durations substantially among constrained households i derive a formula for the optimal benefit level that depends only on the reduced form liquidity and moral hazard elasticities the formula implies that the optimal ui benefit level exceeds 50 percent of the wage the exact identification approach to welfare analysis proposed here yields robust optimal policy results because it does not require structural estimation of primitives

disability earnings income and consumption using longitudinal data for the period 1968 2005 for a sample of male household heads we determine the prevalence of disability during the working years and examine how the extent of disability affects a range of outcomes including earnings income and consumption we have seven main findings first disability rates are high we divide the disabled along two dimensions based on the persistence and severity of their work limiting condition we estimate that a person reaching age 56 has a 53 percent chance of having been disabled at least once during his working years and a 19 percent chance that he has begun a chronic and severe disability second the economic consequences of disability are frequently profound ten years after disability onset a person with a chronic and severe disability on average experiences a 68 percent decline in earnings a 32 percent decline in after tax income a 22 percent decline in food and housing consumption and a 21 percent decline in food consumption third the various economic consequences differ sharply across disability groups the outcome declines for those with a chronic and severe disability are often more than twice as large as those for the average disabled fourth our findings show the partial and incomplete roles that individual savings family support and social insurance play in reducing the consumption drop that follows disability only about half of this most disabled group reports receiving social security disability insurance or supplemental security income fifth we find a noticeable fall in earnings and income prior to the onset of a reported disability consumption also falls somewhat suggesting that future disability is partially but incompletely predictable in the short run sixth time use and detailed consumption data further indicate that disability is associated with a decline in well being seventh the quantities we have estimated combined with elasticities from the literature allow us to examine the optimality of current compensation for the disabled we find that the current compensation for our most disabled group appears to be lower than is optimal

reservation wages and unemployment insurance this paper argues that a risk averse worker s after tax reservation wage encodes all the relevant information about her welfare this insight leads to a novel test for the optimality of unemployment insurance based on the responsiveness of reservation wages to unemployment benefits some existing estimates imply significant gains to raising the current level of unemployment benefits in the united states but highlight the need for more research on the determinants of reservation wages our approach complements those based on baily s 1978 test

the optimal income taxation of couples this paper analyzes the general nonlinear optimal income tax for couples a multidimensional screening problem each couple consists of a primary earner who always participates in the labor market but makes an hours of work choice and a secondary earner who chooses whether or not to work if second earner participation is a signal of the couple being better worse off we prove that optimal tax schemes display a positive tax subsidy on secondary earnings and that the tax subsidy on secondary earnings decreases with primary earnings and converges to zero asymptotically we present calibrated microsimulations for the united kingdom showing that decreasing tax rates on secondary earnings is quantitatively significant and consistent with actual income tax and transfer programs

simulation of a health insurance market with adverse selection a health insurance market is examined in which individuals with a history of high utilization of health care services tend to select fee for service ffs insurance when offered a choice between ffs and health maintenance organizations hmos in addition hmos are assumed to practice community rating of employee groups based on these observations and health plan enrollment and premium data from minneapolis st paul a deterministic simulation model is constructed to predict equilibrium market shares and premiums for hmo and ffs insurers within a firm despite the fact that favorable selection enhances their ability to compete with ffs insurers the model predicts that hmos maximize profits at less than 100 market share and at a lower share than they could conceivably capture that is hmos would not find it to their advantage to drive ffs insurers from the market even if they could in all cases however the profit maximizing hmo premium is greater than the experience rated premium and thus the ave

the incidence of mandated maternity benefits i consider the labor market effects of mandates which raise the costs of employing a demographically identifiable group the efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group specific wages i study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans raising the relative cost of insuring women of childbearing age i find substantial shifting of the costs of these mandates to the wages of the targeted group correspondingly i find little effect on total labor input for that group jel 118 j32 h51 in an era of tight fiscal budget constraints mandating employer provision of workplace benefits to employees is an attractive means for a government to finance its policy agenda consequently in recent years there has been a growth of interest in mandated benefits as a tool of social policy for example the centerpiece of president bill clinton s health care proposal is mandated employer provision of health insurance and more than 20 states have man

forecasting regional gdp with factor models how useful are national and international data we assess the contribution of national country wide and international data to the task of forecasting the real gdp of canadian provinces using the targeting predictors approach of bai and ng 2008 bai j ng s 2008 forecasting economic time series using targeted predictors journal of econometrics 146 304 317 we find that larger datasets containing regional national and international data help improve forecasting accuracy for horizons below the one year ahead mark but that beyond that horizon relying on provincial data alone produces the best forecasts these results suggest that shocks originating at the national and international levels are transmitted to canadian regions and reflected in regional timeseries fairly rapidly

time consistent health insurance currently available health insurance contracts often fail to insure long term illnesses sick people can suffer large increases in premiums or denial of coverage i describe insurance contracts that solve this problem their key feature is a severance payment a person who is diagnosed with a long term illness and whose premiums are increased receives a lump sum equal to the increased present value of premiums this lump sum allows him or her to pay the higher premiums required by any insurer people are not tied to a particular insurer or a group and the improvement is free insurance companies can operate at zero economic profits and consumers can pay exactly the same premium they do with standard contracts

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

adverse selection in insurance markets policyholder evidence from the u k annuity market in this paper we investigate the importance of adverse selection in insurance markets we use a unique data set consisting of all annuity policies sold by a large u k insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies we find systematic relationships between ex post mortality and annuity policy characteristics such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time these mortality patterns are consistent with the presence of asymmetric information in the annuity market we find no evidence of substantive mortality differences however across annuities of different size even though models of insurance market equilibrium with asymmetric information would predict such differences we also find that the pricing of various features of annuity contracts is consistent with the self selection patterns we find in mortality rates our results therefore suggest that selection may occur across many specific features of insurance contracts and that the absence of selection on one contract dimension does not preclude its presence on others this highlights the importance of considering the detailed features of insurance contracts when testing theoretical models of asymmetric information

a unified welfare analysis of government policies we conduct a comparative welfare analysis of 133 historical policy changes over the past half century in the united states focusing on policies in social insurance education and job training taxes and cash transfers and in kind transfers for each policy we use existing causal estimates to calculate both the benefit that each policy provides its recipients measured as their willingness to pay and the policy s net cost inclusive of long term impacts on the government s budget we divide the willingness to pay by the net cost to the government to form each policy s marginal value of public funds or its mvpf comparing mvpfs across policies provides a unified method of assessing their impact on social welfare our results suggest that direct investments in low income children s health and education have historically had the highest mvpfs on average exceeding 5 many such policies have paid for themselves as governments recouped the cost of their initial expenditures through additional taxes collected and reduced transfers we find large mvpfs for education and health policies amongst children of all ages rather than observing diminishing marginal returns throughout childhood we find smaller mvpfs for policies targeting adults generally between 0 5 and 2 expenditures on adults have exceeded this mvpf range in particular if they induced large spillovers on children we relate our estimates to existing theories of optimal government policy and we discuss how the mvpf provides lessons for the design of future research

worker displacement and the added worker effect this article examines the added worker effect which is the labor supply response of wives to their husbands job losses unlike past studies which focused on the husbands current unemployment status this article analyzes wives responses before and after job losses to examine the life cycle labor supply adjustments using panel study of income dynamics data reveals small predisplacement effects and large persistent postdisplacement effects the timing of the responses differs with type of displacement possibly because of differences in the information acquired before job loss long run labor supply increases compensate for over 25 of the husbands lost income

estimating welfare in insurance markets using variation in prices we provide a graphical illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection we then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance such variation together with quantity data allows us to estimate the demand for insurance the same variation together with cost data allows us to estimate how insurers costs vary as market participants endogenously respond to price the slope of this estimated cost curve provides a direct test for both the existence and the nature of selection and the combination of demand and cost curves can be used to estimate welfare we illustrate our approach by applying it to data on employerprovided health insurance from one specific company we detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small in both absolute and relative terms

economic growth technical change biases and the elasticity of substitution a test of the de la grandville hypothesis a recent development in microeconomic theory suggests that the size of the elasticity of substitution between factors is relevant to economic growth this study undertakes an empirical investigation of this proposition comparing two economies the united states and south korea the authors test results support the de la grandville hypothesis that the elasticity of substitution is a potent explanatory variable of economic growth this inquiry also provides a clue to the puzzle that the u s elasticity of substitution between labor and capital is well below unity whereas that of south korea is close to unity nonetheless the u s factor shares have tended to remain fairly stable whereas the distributive shares of south korea seem to have changed in favor of capital their findings indicate that a high elasticity of substitution is a bad signal for the distribution of income under the paradigm of modern technology copyright 1991 by mit press

liquidity and insurance for the unemployed we study the optimal design of unemployment insurance for workers sampling job opportunities over time we focus on the optimal timing of benefits and the desirability of allowing workers to freely access a riskless asset when workers have constant absolute risk aversion preferences it is optimal to use a very simple policy a constant benefit during unemployment a constant tax during employment that does not depend on the duration of the spell and free access to savings using a riskless asset away from this benchmark for constant relative risk aversion preferences the welfare gains of more elaborate policies are minuscule our results highlight two largely distinct roles for policy toward the unemployed a ensuring workers have sufficient liquidity to smooth their consumption and b providing unemployment benefits that serve as insurance against the uncertain duration of unemployment spells

the effects of rate regulation on demand for supplemental health insurance many developed countries have a market for private health insurance that supplements publicly funded universal coverage government regulation of the supplemental market including the extent to which insurers are permitted to adjust premiums based on individual characteristics such as age sex and health status varies across countries oecd 2004 proponents of rate regulation argue that the resulting crosssubsidization from low to high risks is necessary to maintain the affordability of coverage for high risks economic theory however raises the concern that the inability to adjust premiums to reflect individual risk could create adverse selection by driving low risks from the market michael rothschild and joseph stiglitz 1976 little empirical evidence exists to determine the optimal role of rate regulation in private supplemental insurance markets existing studies of the consequences of rating restrictions focus on markets for primary health insurance and find that these laws have had surprisingly little effect on overall rates of coverage simon 2004 in this paper we study the effects of rate regulation in supplemental health insurance markets by examining the market for individually purchased coverage that supplements medicare among the elderly in the united states while the publicly financed medicare program provides nearly universal coverage of a standard set of benefits for those 65 and over beneficiaries are exposed to significant financial risk due to the cost sharing associated with covered services and a lack of coverage for some important services the vast majority of medicare beneficiaries obtain supplemental coverage through a complex system of publicly and privately funded sources state medicaid programs provide publicly financed supplemental coverage for low income and disabled beneficiaries and employers provide highly subsidized retiree supplemental health insurance for other beneficiaries but the remainder rely on highly regulated private insurance markets medicare s part c managed care plans are a voluntary private replacement for traditional medicare while medigap coverage is a private policy bought by about 30 percent of medicare beneficiaries that provides only supplemental benefits franklin j eppig and george s chulis 1997 our study examines the effects of regulations limiting the information on individual characteristics insurers can use in setting premiums for medigap coverage

optimal mandates and the welfare cost of asymmetric information evidence from the u k annuity market much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected once detected however there has been little attempt to quantify its welfare cost or to assess whether and what potential government interventions may reduce these costs to do so we develop a model of annuity contract choice and estimate it using data from the u k annuity market the model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options we focus on the choice of length of guarantee among individuals who are required to buy annuities the results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about 127 million per year or about 2 percent of annuitized wealth we also find that by requiring that individuals choose the longest guarantee period allowed mandates could achieve the first best allocation however we estimate that other mandated guarantee lengths would have detrimental effects on welfare since determining the optimal mandate is empirically difficult our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest

middle class without a net savings financial fragility and preferences over social insurance in this article we show that it is crucial to distinguish between liquid and illiquid wealth to understand how voters form preferences toward social insurance many households are financially frag

the life insurance market asymmetric information revisited abstract this paper finds evidence for the presence of asymmetric information in the life insurance market a conclusion contrasting with the existing literature in particular we find a significant and positive correlation between the decision to purchase life insurance and subsequent mortality conditional on risk classification individuals who died within a 12 year time window after a base year were 19 more likely to have taken up life insurance in that base year than were those who survived the time window moreover as might be expected when individuals have residual private information we find that the earlier an individual died the more likely she was to have initially bought insurance the primary factor driving the difference between our and the prior literature s findings is that we focus on a sample of potential new buyers rather than on the entire cross section to address the sample selection problem induced by potential mortality differences between those with and those without coverage

how prudent are consumers using data from the consumer expenditure survey this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive the coefficient of relative prudence the test yields a fairly precise estimate of a small precautionary motive in fact the estimate is too small to be consistent with widely accepted beliefs about risk aversion the presence of liquidity constrained households does not appear to explain this finding and there is some evidence that self selection of households into risky environments also cannot explain the results

the long run consumption effects of earnings shocks although prior studies of job displacement and disability have measured the impact of these shocks in terms of lost earnings no previous research has linked these permanent earnings shocks to the

efficient unemployment insurance this paper constructs a tractable general equilibrium model of search with risk aversion an increase in risk aversion reduces wages unemployment and investment unemployment insurance has the opposite effect insured workers seek high wage jobs with high unemployment risk an economy with risk neutral workers achieves maximal output without any unemployment insurance but an economy with risk averse workers requires a positive level of unemployment insurance to maximize output therefore moderate unemployment insurance not only improves risk sharing but also increases output

female labour supply human capital and welfare reform we estimate a dynamic model of employment human capital accumulation including education and savings for women in the united kingdom exploiting tax and benefit reforms and use it to analyze the effects of welfare policy we find substantial elasticities for labor supply and particularly for lone mothers returns to experience which are important in determining the longer term effects of policy increase with education but experience mainly accumulates when in full time employment tax credits are welfare improving in the u k increase lone mother labor supply and marginally reduce educational attainment but the employment effects do not extend beyond the period of eligibility marginal increases in tax credits improve welfare more than equally costly increases in income support or tax cuts

a general formula for the optimal level of social insurance in an influential paper baily 1978 showed that the optimal level of unemployment insurance ui in a stylized static model depends on only three parameters risk aversion the consumption smoothing benefit of ui and the elasticity of unemployment durations with respect to the benefit rate this paper examines the key economic assumptions under which these parameters determine the optimal level of social insurance i show that a baily type expression with an adjustment for precautionary saving motives holds in a general class of dynamic models subject to weak regularity conditions for example the simple reduced form formula derived here applies with arbitrary borrowing constraints durable consumption goods private insurance arrangements and search and leisure benefits of unemployment

unemployment insurance benefit levels and consumption changes abstract we use a canadian survey of the unemployed to examine how household expenditures after a job loss respond to the level of income replacement provided by ui we isolate a liquidity constraint or transitory income effect from the permanent income shock of job loss and from the costs of working we find significant effects of varying the replacement ratio among the third of the sample who did not have assets at the job loss we conclude that the consumption smoothing benefit of ui is concentrated wholly on a sub group of the unemployed

superior information income shocks and the permanent income hypothesis according to the permanent income hypothesis with quadratic preferences households save for a rainy day the transitory component of income innovations and consume entirely the permanent one the m

personal experiences and expectations about aggregate outcomes using novel survey data we document that individuals extrapolate from recent personal experiences when forming expectations about aggregate economic outcomes recent locally experienced house price movements affect expectations about future u s house price changes and higher experienced house price volatility causes respondents to report a wider distribution over expected u s house price movements when we exploit within individual variation in employment status we find that individuals who personally experience unemployment become more pessimistic about future nationwide unemployment the extent of extrapolation is unrelated to how informative personal experiences are is inconsistent with risk adjustment and is more pronounced for less sophisticated individuals