Human Capital Risk, Contract Enforcement, and the Macroeconomy

55 Pages Posted: 31 Dec 2011

See all articles by Tom Krebs

Tom Krebs

University of Mannheim

Moritz Kuhn

University of Bonn

Mark L. J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 3 versions of this paper

Date Written: December 2011

Abstract

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.

Suggested Citation

Krebs, Tom and Kuhn, Moritz and Wright, Mark L.J., Human Capital Risk, Contract Enforcement, and the Macroeconomy (December 2011). NBER Working Paper No. w17714. Available at SSRN: https://ssrn.com/abstract=1977764

Tom Krebs (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Moritz Kuhn

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Mark L.J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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