Abstract
We use data on life insurance contracts to study the properties of long-term contracts in a world where buyers cannot commit to a contract. The data are especially suited to test a theory of dynamic contracting since they include information on the entire profile of future premiums. All the patterns in the data fit the theoretical predictions of a model with symmetric learning and one-sided commitment aÌ la Harris and Holmstom. The lack of commitment by consumers shapes contracts in the way predicted by the theory: all contracts involve front-loading (prepayment) of premiums. Front-loading generates a partial lock-in of consumers; more front-loading is associated with lower lapsation. Moreover, contracts that are more front-loaded have a lower present value of premiums over the period of coverage. This is consistent with the idea that front-loading enhances consumer commitment and that more front-loaded contracts retain better risk pools.
Original language | English (US) |
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Pages (from-to) | 299-327 |
Number of pages | 29 |
Journal | Quarterly Journal of Economics |
Volume | 118 |
Issue number | 1 |
DOIs | |
State | Published - Feb 2003 |
ASJC Scopus subject areas
- Economics and Econometrics