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Insurance moves resources across both time and states. We study the consumptionsmoothing
benefits of insurance under liquidity constraints in a model where contracts
span multiple consumption periods. The normative benchmarks for insurance demand
under liquidity constraints differ qualitatively and quantitatively from the standard
model: individuals may only partially insure at actuarially fair prices, may benefit
from insurance when premiums are very high and even sometimes when dominated,
and may value insurance against events that will surely happen. Using simulations for
health insurance, we highlight how these findings generate insights about how costsharing
should be designed differently for liquidity-constrained populations.
