Liquidity Constraints and the Value of Insurance

Keith Marzilli Ericson and Justin Sydnor

American Economic Journal: Microeconomics, 2026, vol. 18, issue 3, 426-53

Abstract: Insurance moves resources across both time and states. We study the consumption-smoothing benefits of insurance under liquidity constraints in a model where contracts span multiple consumption periods. The normative benchmarks for insurance demand under liquidity constraints differ qualitatively and quantitatively from the standard model: Individuals may only partially insure at actuarially fair prices, may benefit from insurance when premiums are very high and even sometimes when dominated, and may value insurance against events that will surely happen. Using simulations for health insurance, we highlight how these findings generate insights about how cost-sharing should be designed differently for liquidity-constrained populations.

JEL-codes: D86 G21 G51 G52 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/mic.20240042

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