Sven H. Sinclair

Bio: Sven H. Sinclair is an academic researcher. The author has contributed to research in topics: Incomplete markets & Overlapping generations model. The author has an hindex of 4, co-authored 6 publications receiving 159 citations.

Health Shocks and the Demand for Annuities

Abstract: A new explanation is offered for the thin private market for individual annuities in the United States. Individuals face a risk of health shocks which simultaneously cause large uninsured expenses and shorten the life expectancy. The value of a life annuity then decreases at the same time as the need for cash increases, undermining its effectiveness in providing financial security. When the risk of such health shocks is substantial, it is no longer optimal for risk-averse individuals with uncertain life spans to hold all of their wealth in life annuity form, even if annuity contracts are reversible, and bequest motives, transaction costs and adverse selection are absent. A dynamic programming model is used to compute the demand for annuities, under conditions involving health shocks, in an overlapping-generations setting calibrated to resemble the United States economy. The model is used to estimate the demand for life annuities and the relative significance of the factors that affect the demand: health shocks, Social Security, bequest motives and premium loads. It is useful for understanding various modes of drawing down retirement savings, measuring the extent of uninsured health-related risks (particularly long-term care expenses) and providing a consistent framework for analysis of various approaches to insure such risks.

Health Shocks and the Demand for Annuities: Technical Paper 2004-09

Abstract: A new explanation is offered for the thin private market for individual annuities in the United States. Individuals face a risk of health shocks which simultaneously cause large uninsured expenses and shorten the life expectancy. The value of a life annuity then decreases at the same time as the need for cash increases, undermining its effectiveness in providing financial security. When the risk of such health shocks is substantial, it is no longer optimal for risk-averse individuals with uncertain life spans to hold all of their wealth in life annuity form, even if annuity

Assessing the Empirical Validity of the Intertemporal Labor Supply Response from a Stochastic Overlapping Generations Model with Incomplete Markets

Abstract: We evaluate the labor supply response in a stochastic overlapping generations model with incomplete markets and a non separable utility function in labor and consumption. Using a simulated panel from the model, we calculate the labor supply response to anticipated changes in wages (holding the marginal utility of wealth constant-that is, the Frisch elasticity) and to unanticipated change in wages (which describes the effect of uncertainty in labor supply responses). The model’s Frisch elasticity estimate is 0.33, which is slightly higher than the empirical estimates in the earlier literature but somewhat lower than more recent estimates. The paper also shows that the borrowing constraints in the model reduce substantially the estimates of the Frisch elasticity. The labor supply response to an unanticipated change in wages is small because of large wealth effects. Having all the variables required and no measurement error, we calculate the omitted variable bias of not controlling for the level and variance (risk) of the unexpected changes in wages. Omitting both variables biases the estimates of the Frisch elasticity downward by a factor of 8; omitting measures of wage risk alone biases it by a factor of 1.4. JEL CODES: J22, D91, D58

Labor supply response in macroeconomic models: Assessing the empirical validity of the intertemporal labor supply response from a stochastic overlapping generations model with incomplete markets

Abstract: We evaluate the labor supply response in a stochastic overlapping generations model with incomplete markets and a non separable utility function in labor and consumption. Using a simulated panel from the model, we calculate the labor supply response to anticipated changes in wages (holding the marginal utility of wealth constant-that is, the Frisch elasticity) and to unanticipated change in wages (which describes the effect of uncertainty in labor supply responses). The model's Frisch elasticity estimate is 0.33, which is slightly higher than the empirical estimates in the earlier literature but somewhat lower than more recent estimates. The paper also shows that the borrowing constraints in the model reduce substantially the estimates of the Frisch elasticity. The labor supply response to an unanticipated change in wages is small because of large wealth effects. Having all the variables required and no measurement error, we calculate the omitted variable bias of not controlling for the level and variance (risk) of the unexpected changes in wages. Omitting both variables biases the estimates of the Frisch elasticity downward by a factor of 8; omitting measures of wage risk alone biases it by a factor of 1.4

The Effect of Wage Risk and Cross-Sectional Aggregation on the Labor Supply Response in Macroeconomic Models 1

Abstract: We evaluate the labor supply response in a stochastic overlapping generations model with incomplete markets and a balanced social security system with payroll taxes and benefit claims that depend on the actual earnings history. The model is calibrated with PSID data to fit the main features of the US economy including the fraction of borrowing constrained households. First, we calculate the labor supply response to anticipated changes in wages holding the marginal utility of wealth constant (Frisch elasticity) using methods from the empirical literature and compare them with the elasticity implied by the individual’s theoretical problem. In line with previous studies, we find that they differ by a factor of 1.5 to 6. Higher order approximation terms that result from mapping the individual problem to the empirical specification account for between 71% and 93% of that difference, while borrowing constraints account for the rest, a result in contrast to Domeij and Floden (2006). Second, identified within the higher order approximation terms, we calculate the labor supply response to unanticipated changes in wages (the effect of wage shocks and wage uncertainty) finding small responses due to large and age-decreasing wealth effects. Omitting measures of wage uncertainty biases the estimates of the Frisch elasticity toward zero. We also calculate the macroeconomic (cross sectional aggregation) Frisch elasticity at the extensive and intensive margins. The extensive margin macro Frisch elasticity is 0.17. The intensive margin macro Frisch elasticity is 1.4, but suffers from bias due to cross sectional aggregation (determined by Thail’s entropy index). Once this bias is corrected, the estimate drops to 0.7. Adding both margins, the macro Frisch elasticity is 0.87, lower than the value suggested by other macroeconomic studies.

The Family as an Incomplete Annuities Market

Abstract: A new empirical study of the relation between money, nominal income, prices, and real output in postwar quarterly U.S. data rejects virtually all of the conclusions reached by Families provide individuals with risk sharing opportunities which may not otherwise be available. Within the family there is a degree of trust and a level of information which alleviates three key problems in the provision of insurance by markets open to the general public, namely, moral hazard, adverse selection, and deception. The informational advantages of pooling risk within families must be set against the inability of families to provide complete insurance because of the small size of the risk pooling group. This paper demonstrates how families can provide insurance against uncertain dates of death. Death risk sharing family arrangements effectively constitute an incomplete annuities market. Our analysis indicates that these arrangements even in small families can substitute by more than70% for complete annuities. Given the adverse selection problem and transactions costs in public annuity markets, risk pooling in families may well be preferred to purchasing market annuities. In the absence of organized public markets in annuities, these risk sharing arrangements provide powerful economic incentives for marriage and family formation. The paper suggests that inter-family transfers need have nothing to do with altruistic feelings; rather, they may simply reflect risk sharing behavior of completely selfish family members.(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of thi(This abstract was borrowed from another version of this item.)

Annuities and Individual Welfare

Abstract: Advancing annuity demand theory, we present suffcient conditions for the optimality of full annuitization under market completeness that are substantially less restrictive than those used by Yaari (1965). We examine demand with market incompleteness, finding that positive annuitization remains optimal widely, but complete annuitization does not. How uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk. A new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization, suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases.

Quantitative Macroeconomics with Heterogeneous Households

Abstract: Macroeconomics is evolving from the study of aggregate dynamics to the study of the dynamics of the entire equilibrium distribution of allocations across individual economic actors. This article reviews the quantitative macroeconomic literature that focuses on household heterogeneity, with a special emphasis on the "standard" incomplete markets model. We organize the vast literature according to three themes that are central to understanding how inequality matters for macroeconomics. First, what are the most important sources of individual risk and cross-sectional heterogeneity? Second, what are individuals' key channels of insurance? Third, how does idiosyncratic risk interact with aggregate risk?

Asset Management: A Systematic Approach to Factor Investing

Abstract: Preface: Asset Management Part I: The Asset Owner Chapter 1: Asset Owners Chapter 2: Preferences Chapter 3: Mean-Variance Investing Chapter 4: Investing for the Long Run Chapter 5: Investing Over the Life Cycle Part II: Factor Risk Premiums Chapter 6: Factor Theory Chapter 7: Factors Chapter 8: Equities Chapter 9: Bonds Chapter 10: Alpha (and the Low Risk Anomaly) Chapter 11: " Assets Chapter 12: Tax-Efficient Investing Chapter 13: Illiquid Assets Chapter 14: Factor Investing Part III: Delegated Portfolio Management Chapter 15: Delegated Investing Chapter 16: Mutual Funds and Other 40-Act Funds Chapter 17: Hedge Funds Chapter 18: Private Equity Afterword: Factor Management Appendix: Returns Acknowledgements Bibliography Index