Human Capital Risk, Contract Enforcement, and the Macroeconomy
Tom Krebs, Moritz Kuhn, Mark L. J. Wright
American Economic Review · 2015 · Volume 105 · Issue 11
Abstract
We use microdata to show that young households with children are underinsured against the risk that an adult member of the household dies. This empirical finding can be explained by a macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to limited contract enforcement. When calibrated, the model quantitatively accounts for the observed life-cycle variation in life insurance holdings, financial wealth, earnings, and consumption inequality. The model also predicts that reforms making consumer bankruptcy more costly will substantially increase the volume of both credit and insurance. (JEL D14, D91, G22, J13, J24)
Keywords
Household Saving, Personal Finance, Intertemporal Household Choice, Life Cycle Models and Saving, Insurance, Insurance Companies, Actuarial Studies, Fertility, Family Planning, Child Care, Children, Youth, Human Capital, Skills, Occupational Choice, Labor Productivity
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