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Pay What Your Dad Paid: Commitment and Price Rigidity in the Market for Life Insurance

Radek Paluszynski and Pei Cheng Yu

No 2019-02, Discussion Papers from School of Economics, The University of New South Wales

Abstract: Life insurance premiums display significant rigidity in the data, on average adjusting once every 3 years by more than 10%. This contrasts with the underlying marginal cost which exhibits considerable volatility due to the movements in interest and mortality rates. We build and calibrate a model where policyholders are held-up by long-term insurance contracts, resulting in a time inconsistency problem for the firms. The optimal contract takes the form of a simple cutoff rule: premiums are rigid for cost realizations smaller than the threshold, while adjustments must be large and are only possible when cost realizations exceed it.

Keywords: Life insurance; Time inconsistency; Hold-up problem; Commitment; Flexibility (search for similar items in EconPapers)
JEL-codes: G22 L11 L14 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2019-02
New Economics Papers: this item is included in nep-hea, nep-ias and nep-ind
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