Creator: Koijen, Ralph S. J. and Yogo, Motohiro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 505 Abstract:
Liabilities ceded by life insurers to shadow reinsurers (i.e., less regulated and unrated off-balance-sheet entities) grew from $11 billion in 2002 to $364 billion in 2012. Life insurers using shadow insurance, which capture half of the market share, ceded 25 cents of every dollar insured to shadow reinsurers in 2012, up from 2 cents in 2002. Our adjustment for shadow insurance reduces risk-based capital by 53 percentage points (or 3 rating notches) and increases default probabilities by a factor of 3.5. We develop a structural model of the life insurance industry and estimate the impact of current policy proposals to limit or eliminate shadow insurance. In the counterfactual without shadow insurance, the average company using shadow insurance would raise prices by 10 to 21 percent, and annual life insurance underwritten would fall by 7 to 16 percent for the industry.
Keyword: Reinsurance, Demand estimation, Regulatory arbitrage, Life insurance industry, and Capital regulation Subject (JEL): L51 - Economics of Regulation, G28 - Financial Institutions and Services: Government Policy and Regulation, G22 - Insurance; Insurance Companies; Actuarial Studies, and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Creator: Han, Suyoun and Kleiner, Morris Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 556 Abstract:
The length of time from the implementation of an occupational licensing statute (i.e., licensing duration) may matter in influencing labor market outcomes. Adding to or raising the entry barriers are likely easier once an occupation is established and has gained influence in a political jurisdiction. States often enact grandfather clauses and ratchet up requirements that protect existing workers and increase entry costs to new entrants. We analyze the labor market influence of the duration of occupational licensing statutes for 13 major universally licensed occupations over a 75-year period. These occupations comprise the vast majority of workers in these regulated occupations in the United States. We provide among the first estimates of potential economic rents to grandfathering. We find that duration years of occupational licensure are positively associated with wages for continuing and grandfathered workers. The estimates show a positive relationship of duration with hours worked, but we find moderately negative results for participation in the labor market. The universally licensed occupations, however, exhibit heterogeneity in outcomes. Consequently, unlike some other labor market public policies, such as minimum wages or direct unemployment insurance benefits, occupational licensing would likely influence labor market outcomes when measured over a longer period of time.
Keyword: Workforce participation, Labor market regulation, Occupational licensing, Duration and grandfathering effects on wage determination, and Hours worked Subject (JEL): J44 - Professional Labor Markets; Occupational Licensing, L84 - Personal, Professional, and Business Services, J80 - Labor Standards: General, J30 - Wages, Compensation, and Labor Costs: General, L38 - Public Policy, K20 - Regulation and Business Law: General, K00 - Law and Economics: General, J88 - Labor Standards: Public Policy, J08 - Labor Economics Policies, J38 - Wages, Compensation, and Labor Costs: Public Policy, L51 - Economics of Regulation, L88 - Industry Studies: Services: Government Policy, and L12 - Monopoly; Monopolization Strategies
Creator: Hopenhayn, Hugo Andres, Llobet, Gerard, and Mitchell, Matt Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 273 Abstract:
This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract.
Keyword: Patents, Innovation, Sequential Innovation, Asymmetric Information, Policy, Compulsory Licensing, and Mechanism Design Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, H41 - Public Goods, O31 - Innovation and Invention: Processes and Incentives, L50 - Regulation and Industrial Policy: General, D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, K23 - Regulated Industries and Administrative Law, and L51 - Economics of Regulation
Creator: Atkeson, Andrew, Hellwig, Christian, and Ordonez, Guillermo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 464 Abstract:
In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production.
Keyword: General equilibrium, Reputation, Creative destruction, Firm dynamics, Entry and exit, and Regulation Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design, L15 - Information and Product Quality; Standardization and Compatibility, D21 - Firm Behavior: Theory, and L51 - Economics of Regulation