Excessive Dollar Debt: Financial Development and Underinsurance

We propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar-denominated external debt present in these markets. We show that when financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars, this result implies that domestic agents choose excessive dollar debt. We also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets. The retarded entry reinforces the underinsurance problem.     

Household Life Cycle Protection: Life Insurance Holdings, Financial Vulnerability, and Portfolio Implications

Using the Survey of Consumer Finances, we examine the life cycle demand for different types of life insurance. Specifically, we test for the consumer's aversion to income volatility resulting from the death of a household's wage‐earner through the purchase of life insurance. We first develop a financial vulnerability index to control for the risk to the household. We then examine the life cycle demand for life insurance using several definitions of life insurance. We find, in contrast to previous research, that there is a relationship between financial vulnerability and the amount of term life or total life insurance purchased. In addition, we find older consumers use less life insurance to protect a certain level of financial vulnerability than younger consumers. Secondly, our study provides evidence that life insurance demand is jointly determined as part of a household's portfolio. Finally, we consider the impact of family members' nonmonetary contribution on the household's life cycle protection decision. Our results provide some evidence that households take into account the value of nonmonetary contribution in their insurance purchase.     

Borrowing Constraints,Home Ownership and Housing Choice: Evidence from Intra‐Family Wealth Transfers

We study the impact of borrowing constraints on home ownership and housing demand by comparing the tenure choice and housing quality of consumers who receive intra‐family wealth transfers to those that do not. Our analysis is based on household‐level panel data providing information on the receipt of wealth transfers, changes in tenure status as well as changes in the size and quality of housing. On average we find that the receipt of a wealth transfer increases the propensity of consumers to transition from renters to home‐owners by 6–8 percentage points (35% of the sample mean). Additional analyses suggest that this effect is unlikely to be driven by wealth effects and can thus be attributed to the relaxation of borrowing constraints. By contrast, wealth transfers do not increase the likelihood that existing homeowners “trade‐up” to larger homes in better locations.     

On the Demand for Portfolio Insurance

While insurers manage underwriting risk with various methods including reinsurance, insurers increasingly manage asset risk with options, futures, and other derivatives. Previous research shows that buyers of portfolio insurance pay considerably for downside protection. We add to this literature by providing the first evidence on the cost of portfolio insurance, the payoff to portfolio insurance, and the relative demand for portfolio insurance across VIX levels. We find that the demand for portfolio insurance is relatively high at low levels of VIX, suggesting purchasers demand more downside protection when this protection is cheap on an absolute basis (but expensive on a relative basis). We also provide the first evidence on the hedging behavior of specific investor classes and show that the demand for portfolio insurance is driven by retail investors (individuals) who buy costly insurance from institutional investors. Results are consistent with other types of paradoxical insurance‐buying behavior.     

Capital over the Business Cycle: Renting versus Ownership

We find that capital renting makes up one‐fifth of U.S. capital expenditures, and it increases during downturns. Further, we present cross‐country evidence that output losses after financial crises are smaller where renting is more prevalent. To understand these findings, we build a general equilibrium model with borrowing constraints and with the option to rent or buy capital. The countercyclicality of rentals occurs because their supply increases, as renting serves as an additional means of savings when credit markets malfunction. Moreover, demand also shifts toward rentals as they become relatively cheaper. By absorbing excess savings, renting mitigates financial crises.     

ON THE CAPITAL STRUCTURE OF NON‐PROFIT ORGANISATIONS: A REPLICATION AND EXTENSION WITH BELGIAN DATA

The empirical tests of non‐profit organisations' capital structure theories by Jegers and Verschueren (2006) on a sample of Californian non‐profit organisations (data on 1999) are replicated and extended for a more recent Belgian sample (844 observations pertaining to 2007). Three complementary theories to explain the presence and levels of overall debt and financial debt are examined: equity constraints, agency, and borrowing constraints. The decision to borrow and the amount to be borrowed are analysed separately. The estimations obtained reveal that both are driven by different mechanisms. After having removed outliers, the results show effective equity constraints when explaining debt levels, as observed in the Californian sample with respect to the overall amount of debt. The results also indicate an agency explanation of debt: both the decision to borrow from financial institutions, and the overall amount of (financial) debt are positively affected by the presence of a potential agency gap between board and management. In the Californian sample, the results on this were mixed. Borrowing constraints were almost never discovered, similar to the conclusions reached by Jegers and Verschueren. However, slightly reducing the sample by removing outliers makes borrowing constraints apparent. As to the control variables, size positively affects the probability of borrowing, but, for the organisations taking on debt, negatively affects the level of borrowing. As could be expected, the amount of tangible fixed assets in place is positively related to the amount of financial debt.     

Don't They Care? Or,Are They Just Unaware? Risk Perception and the Demand for Long‐Term Care Insurance

The potential need for long‐term care (LTC) is one of the greatest financial risks faced not only by the elderly but also by their adult children, who often provide care or financial assistance. We investigate adult children's role in the demand for LTC insurance. Similar to flood insurance, we find that demand for LTC insurance is low due to low risk perception. The more aware adult children are of the risk, the more likely LTC insurance is to be purchased, either by the children themselves on behalf of their parents or by the parents under the influence of their children.     

“Social Security-Adequacy,Equity, and Progressiveness: A Review of Criteria Based on Experience in Canada and the United States,” Robert L. Brown and Jeffrey Ip,January 2000

Abstract

We consider an optimal dynamic control problem for an insurance company with opportunities of proportional reinsurance and investment. The company can purchase proportional reinsurance to reduce its risk level and invest its surplus in a financial market that has a Black-Scholes risky asset and a risk-free asset. When investing in the risk-free asset, three practical borrowing constraints are studied individually: (B1) the borrowing rate is higher than lending (saving) rate, (B2) the dollar amount borrowed is no more than K > 0, and (B3) the proportion of the borrowed amount to the surplus level is no more than k > 0. Under each of the constraints, the objective is to minimize the probability of ruin. Classical stochastic control theory is applied to solve the problem. Specifically, the minimal ruin probability functions are obtained in closed form by solving Hamilton-Jacobi-Bellman (HJB) equations, and their associated optimal reinsurance-investment policies are found by verification techniques.     

乐观预期、保障能力与商业保险购买——来自中国家庭的微观证据

本文基于中国家庭微观调查数据,在考虑商业保险“保障”和“投资”双重属性的前提下,实证研究了乐观预期对家庭商业保险购买的影响。结果发现,乐观预期对家庭商业保险购买存在显著的积极影响,即户主乐观预期程度越高,家庭购买商业保险的意愿越强。进一步区分保障型商业保险和投资型商业保险,发现乐观预期对商业保险购买的积极影响主要来自对投资型商业保险的需求,对保障型商业保险购买的影响则不显著。更重要地,不同风险保障能力下乐观预期对商业保险购买存在异质性影响,家庭储蓄较多、社会保障覆盖较好以及社会资本水平较高的家庭,乐观预期对商业保险购买的积极影响更大。本研究不仅有助于从预期视角理解商业保险市场的“有限参与”之谜,也为提升家庭风险保障和财富增值能力提供了借鉴。     

金融素养与家庭储蓄率——基于理财规划与借贷约束的解释

金融科技的发展使得人们参与金融市场的门槛与成本迅速降低,金融产品也不断丰富,金融市场参与者的异质性增加,金融素养对家庭金融决策的影响越来越明显。本文研究发现:(1)家庭在安排储蓄与消费时,金融素养有显著影响,金融素养与家庭储蓄率呈倒U型关系。(2)理财规划和借贷约束是影响家庭储蓄率上升的两个渠道。(3)金融素养由低逐渐升高时,家庭的理财规划意识增强,通过提高储蓄率来保障资金充足。当金融素养增加到一定程度,理财规划意识优化资产配置的作用增强,抑制消费的作用减弱,同时借贷约束缓解会帮助家庭增加消费。本文的发现有助于厘清家庭储蓄率差异的成因,对提升居民福利,增强金融教育政策的针对性,有积极意义。     

数字普惠金融与未预期风险应对:理论与实证

本文构建理论模型刻画数字普惠金融对居民未预期风险应对的影响,并基于世界银行2014年和2017年中国普惠金融微观数据进行实证检验。研究表明,数字普惠金融能够有效提高居民风险应对能力,增强贫困人口抵抗风险冲击的韧性。但考虑个体多重借贷行为后发现,适度借贷有益于改善居民风险分担,过度借贷则会损害其风险防御能力,进而弱化数字普惠金融的风险平滑效应,这意味着数字普惠金融增强居民风险应对能力是建立在理性借贷基础之上。进一步分析发现,数字普惠金融还能帮助遭受风险冲击的家庭平稳消费,这一影响主要来源于对非耐用品支出的促进作用。此外,机制检验表明数字普惠金融能在扩大风险分担网络、增进信任机制、培养金融习惯以及提升服务效率等方面带来重要影响。本文为我国推进数字技术与普惠金融融合创新,营造健康数字普惠金融生态圈提供了一定启示。     

Inalienable Customer Capital,Corporate Liquidity,and Stock Returns

We develop a model in which customer capital depends on key talents' contribution and pure brand recognition. Customer capital guarantees stable demand but is fragile to financial constraints risk if retained mainly by talents, who tend to quit financially constrained firms, damaging customer capital. Using a proprietary, granular brand‐perception survey, we construct a firm‐level measure of the inalienability of customer capital (ICC) that captures the degree to which customer capital depends on talents. Firms with higher ICC have higher average returns, higher talent turnover, and more precautionary financial policies. The ICC‐sorted long‐short portfolio's spread comoves with financial constraints factor.     

The Determinants of Financial Health of Asian Insurance Companies

Previous studies of financial health of insurance companies are mainly focused on insurers operating in the United States and developed economies. This article focuses on the solvency of general (property‐liability) and life insurance companies in Asia using firm data and macro data separately. It uses different classification methods to classify the financial status of both general and life insurance companies. With the exception of Japan, failures of insurers in Singapore, Malaysia, and Taiwan are nonexistent. We find that, first, the factors that significantly affect general insurers' financial health in Asian economies are firm size, investment performance, liquidity ratio, surplus growth, combined ratio, and operating margin. Second, the factors that significantly affect life insurers' financial health are firm size, change in asset mix, investment performance, and change in product mix, but the last three factors are more applicable to Japan. Third, the financial health of insurance companies in Singapore seems to be significantly weakened by the Asian Financial Crisis. As the insurance industry in different Asian economies is at different stages of development, they require different regulatory guidelines.     

Disequilibrium in the UK corporate loan market

In the last decade, a debate has resurfaced about whether financial constraints stemming from asymmetric information and incentive problems play an important role in propagating monetary policy shocks. This paper investigates the monetary transmission mechanism in the UK and its impact on the availability of bank credit to small and medium size firms.The empirical specification is based on a disequilibrium model that allows for the possibility of transitory credit rationing. Sample firms are classified endogenously into ‘borrowing constrained’ and ‘borrowing unconstrained’. The analysis of credit rationing takes into account not only firm specific variables, but also important macroeconomic factors such as the prevailing monetary conditions and the stage of the business cycle.We find that (i) firms’ assets play an important role as collateral in mitigating borrowing constraints; (ii) during periods of tight monetary conditions corporate demand for bank credit increases, whereas the supply of bank loans is reduced; (iii) to avoid bank credit rationing smaller companies increase their reliance on interfirm credit; (iv) the proportion of borrowing constrained firms is significantly higher during the recession years of the early 1990s than at other times.     

The impact of a partial borrowing limit on financial decisions

We consider a consumption, investment, life insurance, and retirement decision problem in which an economic agent is allowed to borrow against only a part of future income. The closed-form solution is attained by applying a dual approach that directly imposes the conditions for the borrowing limit on a dual value function. We provide analytic comparative statics for optimal strategies with rigorous proofs. It is confirmed that a more stringent borrowing limit leads to less consumption and less life insurance purchase. However, even with a tighter borrowing limit, an agent with weak incentive to retire can invest more when the wealth level is high enough. We also show that a more stringent borrowing limit can delay or hasten the optimal retirement timing depending on the agent's current wealth level.     

Second-best income taxation and education policy with endogenous human capital and borrowing constraints

We formulate a two-period life cycle model of saving, labor supply, and human capital investment when individuals differ in their ability and initial wealth. Borrowing constraints result in sub-optimal choices for consumption and investments in human capital. We analyze optimal linear income taxes and education subsidies. The optimal income tax is shown to be positive—even in the absence of any redistributional concerns. A redistributive income tax relaxes borrowing constraints by redistributing resources from the unconstrained to the borrowing constrained stages of the life cycle. The income tax thus alleviates preexisting non-tax distortions in the capital market. Human capital is subsidized on a net basis in the absence of redistributional concerns. Education subsidies help to relax credit constraints and to reduce distortions from explicit and implicit taxes on human capital formation. When redistributional concerns are present, education is subsidized more if this helps to alleviate distortions on labor supply, but is subsidized less if education subsidies have a very regressive incidence. Simulations demonstrate that optimal income taxes are substantially higher when credit constraints are present. Education is generally subsidized on a net basis, and the more so if credit constraints are more severe.     

A Dynamic Analysis of the Demand for Life Insurance

Prior research suggests that neither the choice to own life insurance nor the amount purchased is consistently related to the presence of children in the household. While these perplexing findings are based on a static framework, we alternatively examine life insurance demand in a dynamic framework as a function of changes in household life cycle and financial condition. Our results indicate both a statistically and economically significant relation between life events, such as new parenthood, and the demand for life insurance. We also provide new evidence in support of the emergency fund hypothesis: households in which either spouse has become unemployed are more likely than other households to surrender their whole life insurance.     

The Relationship Between Insurance and Economic Development: 85 Empirical Papers for a Review of the Literature

The objective of this article is to propose a review of 85 empirical papers examining the relationships between insurance and economic development, that is, the insurance‐growth nexus. When looking at the economic importance of the insurance sector, most papers in the past have looked at the demand side (the level of economic development is an explanatory variable among other factors that affect the demand for insurance). Because the role of the insurance sector and its contribution to development is at the agenda of international organizations and because the importance of the relationship between financial development and economic growth has been well recognized and emphasized in the field of economic development, more recent papers have examined the causality links between insurance and economic development and the role of insurance as a significant determinant in the process of economic growth.     

The intended and unintended consequences of financial-market regulations: A general-equilibrium analysis

In a production economy with trade in financial markets motivated by the desire to share labor-income risk and to speculate, we show that speculation increases volatility of asset returns and investment growth, increases the equity risk premium, and reduces welfare. Regulatory measures, such as constraints on stock positions, borrowing constraints, and the Tobin tax have similar effects on financial and macroeconomic variables. However, borrowing constraints and the Tobin tax are more successful than constraints on stock positions at improving welfare because they substantially reduce speculative trading without impairing excessively risk-sharing trades.     

On the Corporate Demand for Insurance: The Case of Korean Nonfinancial Firms

Several theories have been developed to explain the motives for corporate insurance purchases, but there are few empirical tests of these theories. Furthermore, the empirical results are not consistent across studies, suggesting the need for further research. This study uses accounting data for 433 publicly listed nonfinancial firms in Korea to test the determinants of insurance demand for the period 1990 through 2001. Our results support the theory that firm size, tax considerations, and firm ownership are important determinants of insurance demand. Firms that are members of chaebols demand more insurance than unaffiliated firms, all else equal. Contrary to theory, our results also indicate that firms that have higher debt‐to‐equity ratios demand less insurance than less leveraged firms, and that firms that have greater liquidity demand more insurance. This might be related to the overall high debt levels of firms in the period leading up to the Korean financial crisis in 1997, but that investigation is beyond the scope of this study.