Agency Theory and Participating Policy Usage: Evidence from Stock Life Insurers
University of New Orleans - College of Business Administration
Steven W. Pottier
University of Georgia - Department of Insurance, Legal Studies, Real Estate
Extant literature demonstrates that participating policies mitigate shareholder-policyholder incentive conflicts in stock insurance firms. However, extending the argument in Mayers and Smith (1994), we formally show that participating policies also exacerbate the shareholder-manager incentive conflicts in stock insurance firms. In this paper, we test whether hypotheses derived from agency theory explain the usage of participating life insurance policies by stock insurers. Our results are consistent with the argument that participating policy usage is dictated by the trade-off between the mitigation of the contracting costs of risk shifting and underinvestment, and the exacerbation of the incentive conflicts between managers and shareholders.
Number of Pages in PDF File: 41
Keywords: agency theory, participating policies, risk shifting, underinvestment, managerial discretion
JEL Classification: G32, L22, G22working papers series
Date posted: August 9, 2001
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