American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Liquidity Constraints and the Value of Insurance
American Economic Journal: Microeconomics
(pp. 426–53)
Abstract
Insurance moves resources across both time and states. We study the consumption-smoothing 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 cost-sharing should be designed differently for liquidity-constrained populations.Citation
Ericson, Keith Marzilli, and Justin Sydnor. 2026. "Liquidity Constraints and the Value of Insurance." American Economic Journal: Microeconomics 18 (3): 426–53. DOI: 10.1257/mic.20240042Additional Materials
JEL Classification
- D86 Economics of Contract: Theory
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- G52 Household Finance: Insurance