 |
June
7 |
|
| "Optimal
Dynamic Contracts: Evidence from Life Insurance" |
| Igal
Hendel, Princenton University |
|
We look at the life insurance industry
to study the properties of long term contracts in a world with imperfect
commitment. The main issue is how contracts are designed to deal with classification
risk when consumers cannot commit to a contract. The data is especially
suited for this investigation; we use data on real contracts which includes
the entire profile of future premiums. We present a model that captures
the main features of this industry and we find that the predictions of
the model get strong support in the data. The lack of commitment by consumers
appears to strongly shape the way contracts are designed. All types of
contracts involve some front-loading. This generates a partial lock-in
of consumers. Contracts that are more front-loaded have a lower present
value of premiums over the period of coverage. This is consistent with
the idea that more front-loaded contracts retain better risk pools. |