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A Welfare Analysis of Capital Insurance

Author

Listed:
  • Ekaterina Panttser

    (Belk College of Business, University of North Carolina at Charlotte, Charlotte, NC 28223, USA)

  • Weidong Tian

    (Belk College of Business, University of North Carolina at Charlotte, Charlotte, NC 28223, USA)

Abstract

This paper presents a welfare analysis of several capital insurance programs in a rational expectation equilibrium setting. We first explicitly characterize the equilibrium of each capital insurance program. Then, we demonstrate that a capital insurance program based on aggregate loss is better than classical insurance, when big financial institutions have similar expected loss exposures. By contrast, classical insurance is more desirable when the bank’s individual risk is consistent with the expected loss in a precise way. Our analysis shows that a capital insurance program is a useful tool to hedge systemic risk from the regulatory perspective.

Suggested Citation

  • Ekaterina Panttser & Weidong Tian, 2013. "A Welfare Analysis of Capital Insurance," Risks, MDPI, vol. 1(2), pages 1-24, September.
    • Handle: RePEc:gam:jrisks:v:1:y:2013:i:2:p:57-80:d:28886
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    References listed on IDEAS

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    1. Pierre-Andre Chiappori & Bernard Salanie, 2000. "Testing for Asymmetric Information in Insurance Markets," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 56-78, February.
    2. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    3. Youngna Choi & Raphael Douady, 2012. "Financial crisis dynamics: attempt to define a market instability indicator," Quantitative Finance, Taylor & Francis Journals, vol. 12(9), pages 1351-1365, August.
    4. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
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    Cited by:

    1. Katerina Ivanov & James Schulte & Weidong Tian & Kevin Tseng, 2021. "An Equilibrium-Based Measure of Systemic Risk," JRFM, MDPI, vol. 14(9), pages 1-24, September.

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