TY  - JOUR
AU  - Hendel,Igal
AU  - Lizzeri,Alessandro
TI  - The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7470
PY  - 2000
Y2  - January 2000
UR  - http://www.nber.org/papers/w7470
L1  - http://www.nber.org/papers/w7470.pdf
N1  - Author contact info:
Igal Hendel
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-8226
Fax: 847/491-7001
E-Mail: igal@northwestern.edu

Alessandro Lizzeri
New York University
Department of Economics
19 W. 4th Street, 6th Floor
New York, NY  10012
E-Mail: alessandro.lizzeri@nyu.edu
AB  - We look at the life insurance industry to study the properties of long term contracts in a world where consumers cannot commit to a contract. The main issue is how contracts are designed to deal with classification risk. We present a model that captures the main features of this industry. The data is especially suited for a test of the theory since it includes information on the entire profile of future premiums. The lack of commitment by consumers shapes contracts in the way predicted by the theory. All types of contracts involve front-loading. This generates a partial lock-in of consumers. Contracts that are more front-loaded have a lower present value of premiums over the period of coverage. This is consistent with the idea that more front-loaded contracts retain better risk pools. The estimates suggest that classification risk is almost completely insured by long term level-premium contracts.
ER  -