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Human Capital Risk, Contract Enforcement, and the Macroeconomy

  • Moritz Kuhn

    (University of Bonn)

  • Mark Wright

    (UCLA)

  • Tom Krebs

    (University of Mannheim)

We develop a macroeconomic model with physical and human capital, human capital risk, and limited contract enforcement. We show analytically that young (high-return) households are the most exposed to human capital risk and are also the least insured. We document this risk-insurance pattern in data on life-insurance drawn from the Survey of Consumer Finance. A calibrated version of the model can quantitatively account for the life-cycle variation of insurance observed in the US data and implies welfare costs of under-insurance for young households that are equivalent to a 4 percent reduction in lifetime consumption. A policy reform that makes consumer bankruptcy more costly leads to a substantial increase in the volume of credit and insurance.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 159.

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Date of creation: 2012
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Handle: RePEc:red:sed012:159
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