Insurance-adjusted valuation, decision making, and capital return

Abstract

Although the insurance industry has a significant economic role, few theoretical studies link insurance with the overlapping generations economy. This study suggests a new overlapping generations model that includes insurance in the agents' economic decisions under the uncertainty of financial losses. In this insurance model, we derive risk-averse workers' optimal insurance purchases and consumption based on the insurance-adjusted valuations, which are the present value of the income streams minus insurance premiums paid in the future. The theoretical equilibrium model predicts capital returns, wealth, labor supply, etc. Our findings show that higher workforce and technological progress increase private insurance demand and reduce the capital-output ratio, and higher losses as a fraction of output increase social insurance demand and reduce the capital-output ratio via numerical comparative statics.