Adriano A. Rampini and
S Viswanathan ()
No 12855, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Insurance has an intertemporal aspect as insurance premia have to be paid upfront. We argue that the financing aspect of insurance is key to understanding basic insurance patterns. In a model with limited enforcement, we show that insurance is globally monotone increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk that affects asset values, under quite general conditions. In equilibrium, insurers are financial intermediaries with collateralized loans as assets and diversified portfolios of insurance claims as liabilities. Collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.
Keywords: Collateral; Financial constraints; household finance; Insurance; Risk management (search for similar items in EconPapers)
JEL-codes: D91 E21 G22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias, nep-mac and nep-rmg
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