Keith Ericson, Boston University

Liquidity Constraints and the Value of Insurance

Abstract

We explore how liquidity constraints affect the value of insurance using a model where insurance contracts span multiple consumption periods. Limits to borrowing create preferences over how insurance contracts move money across time as well as states. Rational liquidity-constrained individuals will demand insurance in ways that depart from the standard model's normative benchmarks. Liquidity-constrained individuals may not buy full insurance even at actuarially-fair prices. Yet because insurance can have a consumption-smoothing benefit, they may purchase some insurance even when premiums are so high that insurance is dominated in the standard model. Liquidity-constrained individuals will not treat all expected-out-of-pocket costs and premiums similarly, and can benefit from cost-sharing designs that are more complex than straight deductibles. Because some puzzling patterns of insurance demand can be consistent with optimal choices under liquidity constraints, the model highlights the importance of considering liquidity when studying insurance demand.

You can read the research paper here

Keith M. Marzilli Ericson is an Associate Professor of Markets, Public Policy, and Law at the Boston University Questrom School of Business, and a Faculty Research Fellow at the National Bureau of Economic Research, and co-editor of the Journal of Public Economics and the American Journal of Health Economics. He is also the Faculty Director of the Undergraduate Business Analytics Program at the Questrom School of Business. He has a Ph.D. in Economics from Harvard University.

Professor Ericson’s research has examined health care markets, such as the Massachusetts Health Insurance Exchange and Medicare Part D. He has shown how pricing regulation interacts with imperfect competition, and how health insurers use dynamic pricing strategies. His recent work has studied how product standardization affects choice on insurance exchanges and how mandates to purchase insurance affect behavior.

Professor Ericson has also explored the foundations of economic decision making (behavioral economics), running experiments on limited memory, the endowment effect and expectations about the future, intertemporal choice, and the effect of privacy on truthful disclosure of sexual orientation.

His work has been published in the Quarterly Journal of Economics, the American Economic Review, the Journal of the European Economic Association, Inquiry, and the American Economic Journal: Economic Policy, among others. Various media outlets have featured his research, including Harvard Business Review, Slate, The Atlantic, Freakonomics Radio, Time, The Los Angeles Times, The Washington Post, and The New York Times.

You can read more about Keith Ericson here

CEBI contact: Christina Gravert