Human Capital Risk, Contract Enforcement, and the Macroeconomy

119 Pages Posted: 19 Nov 2014

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: October 2014

Abstract

We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital (limited contract enforcement). We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured against human capital risk. A calibrated version of the model can quantitatively account for the life-cycle variation of life-insurance holdings, financial wealth, earnings, and consumption inequality observed in the US data. Our analysis implies that a reform that makes consumer bankruptcy more costly, like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, leads to a substantial increase in the volume of both credit and insurance.

Keywords: Human Capital Risk, Limited Enforcement, Life Insurance

JEL Classification: E21, E24, D52, J24

Suggested Citation

Krebs, Tom and Kuhn, Moritz and Wright, Mark L.J., Human Capital Risk, Contract Enforcement, and the Macroeconomy (October 2014). FRB of Chicago Working Paper No. 2014-09. Available at SSRN: https://ssrn.com/abstract=2526293 or http://dx.doi.org/10.2139/ssrn.2526293

Tom Krebs

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 (Contact Author)

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

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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