life - Are Husbands Really That Cheap? Matthew S. Chambers...

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Unformatted text preview: Are Husbands Really That Cheap? Matthew S. Chambers Department of Economics Towson University Don E. Schlagenhauf Department of Economics Florida State University Eric R. Young Department of Economics Florida State University July, 2003 Abstract The life insurance market is one of the most prominent contingent claim markets that exist and thus provides an interesting laboratory to examine agents consumption and risk sharing behavior. An examina- tion of the 1998 Survey of Consumer Finances indicates life insurance patterns may not be consistent with patterns suggested by life-cycle models. In this paper, we investigate these apparent inconsistencies using a dynamic overlapping generation general equilibrium model. The decision making unit is the household, which is subject to mor- tality, demographic and idiosyncratic earnings risk. Households have access to an asset and life insurance market that allows imperfect risk We would like to thank participants in seminars at the 2003 Midwest Macro Meet- ings, 2003 Winter Econometric Society and Florida State University as well as special thanks to Fernando Alvarez, Jesus Fernndez, Carlos Garriga, Stuart Low, Dave MacPher- son, David Marshall, Chris Phelan, and Ned Prescott for helpful comments. We would also like to thank Charles Grassl, Curtis Knox, and Joe Travis for computational assis- tance and tips. Young would like to thank the Florida State University FYAP program for f nancial support. All errors are our errors. Email: mchambers@towson.edu. Email: dschlage@mailer.fsu.edu Corresponding author. Email: eyoung@garnet.acns.fsu.edu. 1 sharing. We f nd that the pricing scheme adopted by the industry has a signi f cant impact on the distribution of policies, and that the pat- tern of life insurance holdings likely constitutes a puzzle for f nancial economics. 2 Failure of the head of a family to insure his or her life against a sudden loss of economic value through death or disability amounts to gambling with the greatest of lifes values; and the gamble is a particularly mean one because, in the case of loss, the dependent family, and not the gambler must su f er the consequences. S. Huebner and K. Black, Jr., Life Insurance 1 Introduction The life insurance market is one of the most prominent contingent claim mar- kets that exist and are readily available to households; thus it provides an interesting laboratory to examine agents consumption and risk sharing be- havior the total size of this market in 1998 was . 95 times annual GDP. Ca- sual empiricism suggests that households are holding an insu cient amount of life insurance, especially in the 25 to 50 age cohort. For example, the media often mentions instances where a widow enters poverty income levels as the result of the untimely death of a spouse....
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This note was uploaded on 12/14/2011 for the course FIN 5515 taught by Professor Staff during the Spring '10 term at FSU.

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life - Are Husbands Really That Cheap? Matthew S. Chambers...

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