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Insurance Pricing, Distortions, and Moral Hazard: Quasi-Experimental Evidence from Deposit Insurance

Published online by Cambridge University Press:  19 January 2023

George F. Shoukry Open the ORCID record for George F. Shoukry [Opens in a new window]
George F. Shoukry*
Affiliation:
Federal Deposit Insurance Corporation Center for Financial Research
*
[email protected]
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Abstract

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Pricing is integral to insurance design, directly influencing firm behavior and moral hazard, though its effects are insufficiently understood. I study a quasi-experiment in which deposit insurance premiums were changed for U.S. banks with unequal timing, generating differentials between banks in both levels and risk-based “steepness” of premiums. I find evidence that differentials in premiums resulted in distortions, including regulatory arbitrage, but also provided strong incentives to curb moral hazard. I find that firms that faced stronger pricing incentives to become (or remain) safer were more likely to subsequently do so than similar firms that faced weaker pricing incentives.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 896 - 932
Creative Commons
This is a work of the US Government and is not subject to copyright protection within the United States. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Copyright
© Federal Deposit Insurance Corporation, 2023

Footnotes

I thank an anonymous referee, Rosalind Bennett, David Coxon (discussant), Mara Faccio (the editor), Vivian Hwa, Małgorzata Iwanicz-Drozdowska (discussant), Kathryn Judge (discussant), Roni Kisin, Troy Kravitz, Mark Kutzbach, Carolina Lopez-Quiles Centeno (discussant), Lynn Shibut, Anjan Thakor (discussant); and participants at the FDIC Center for Financial Research seminar series, the 2020 Community Banking in the 21st Century Research and Policy Conference, the 2021 Biennial International Association of Deposit Insurers (IADI) Research Conference, the 2021 Financial Management Association (FMA) Annual Meeting, and the 2021 Annual FDIC Bank Research Conference. All errors are my own. Views and opinions expressed in this article reflect those of the author and do not necessarily reflect those of the FDIC or the United States.

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