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The Dynamics of Market Insurance, Insurable Assets, and Wealth Accumulation

  • Koeniger, Winfried

    ()

    (University of St. Gallen)

We analyze dynamic interactions between market insurance, the stock of insurable assets and liquid wealth accumulation in a model with non-durable and durable consumption. The stock of the durable is exposed to risk against which households can insure. Since the model does not have a closed form solution we first provide an analytical approximation for the case in which households own abundant liquid wealth. It turns out that precautionary motives still matter because of fluctuations of the predetermined durable stock. Second we solve the model numerically. With deterministic labor income the representative agent demands a nonnegligible amount of market insurance. The deductible is substantially higher than in static models because agents can time-diversify their risk. Market insurance implies welfare gains of around .6% in terms of non-durable consumption. Introducing labor income risk into the model does not necessarily increase the importance of market insurance if the borrowing constraint endogenously tightens.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 615.

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Length: 39 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:iza:izadps:dp615
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