Working Paper: NBER ID: w17714
Authors: Tom Krebs; Moritz Kuhn; Mark L. J. Wright
Abstract: We develop a macroeconomic model with physical and human capital, human capital risk, and limited contract enforcement. We show analytically that young (high-return) households are the most exposed to human capital risk and are also the least insured. We document this risk-insurance pattern in data on life-insurance drawn from the Survey of Consumer Finance. A calibrated version of the model can quantitatively account for the life-cycle variation of insurance observed in the US data and implies welfare costs of under-insurance for young households that are equivalent to a 4 percent reduction in lifetime consumption. A policy reform that makes consumer bankruptcy more costly leads to a substantial increase in the volume of credit and insurance.
Keywords: Human Capital; Risk; Contract Enforcement; Macroeconomy
JEL Codes: D52; E21; E24; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Young high-return households (G59) | human capital risk (J24) |
| Young high-return households (G59) | insurance coverage (G52) |
| Underinsurance (G52) | welfare costs (I30) |
| human capital risk (J24) | insurance coverage (G52) |
| Making consumer bankruptcy more costly (K35) | volume of credit and insurance (G22) |
| volume of credit and insurance (G22) | economic growth (O49) |