Working Papers

Equal Prices, Unequal Access: The Effects of National Pricing in the US Life Insurance Industry

Paper | Slides

Presented at: Princeton University, Federal Reserve Bank of Richmond Brown Bag, University of Kentucky (Gatton), Indiana University (Kelley), Duke University (Fuqua)

Abstract: Regulators often promote financial inclusion by restricting prices. In response, firms may reduce the supply of their product, implying that some households lose from reduced access. This paper explores this tradeoff in the context of national price setting regulation in the US life insurance industry. I collect a new data set with over one million insurer-agent links across a subset of US commuting zones and document that poor commuting zones have fewer agents per household, fewer active insurers, and smaller and lower-rated insurers relative to rich commuting zones. Motivated by the data, I build a spatial model with multi-region insurers and households with heterogeneous preferences for differentiated life insurance products. The model captures the empirical spatial sorting patterns and admits clear predictions for how insurer location choices change in response to national pricing. I take the model to the data and estimate price elasticities for low- and high-income households. Under flexible pricing, welfare differences between the poorest commuting zones and the richest commuting zone are between 0.4-0.95% of yearly income, most of which comes from differential access to insurers. National pricing amplifies spatial access disparities due to the geographic reallocation of insurers toward richer markets. Place-based tax policies that target the access margin reduce welfare differences between poor and rich commuting zones by 10.3-20.6%.


Presented at: Federal Reserve Bank of Richmond Core Week

Abstract: We study the spatial expansion of banks in response to banking deregulation in the 1980s and 90s. During this period, large banks expanded rapidly, mostly by adding new branches in new locations, while many small banks exited. We document that large banks sorted into the densest markets, but that sorting weakened over time as large banks expanded to more marginal markets in search of locations with a relative abundance of retail deposits. This allowed large banks to reduce their dependence on expensive wholesale funding and grow further. To rationalize these patterns we propose a theory of multi-branch banks that sort into heterogeneous locations. Our theory yields two forms of sorting. First, span-of-control sorting incentivizes top firms to select the largest markets and smaller banks the more marginal ones. Second, mismatch sorting incentivizes banks to locate in more marginal locations, where deposits are abundant relative to loan demand, to better align their deposits and loans and minimize wholesale funding. Together, these two forms of sorting account well for the sorting patterns we document in the data.


Works in Progress

Growing by Grafting

with Ezra Oberfield

    Esteban Rossi-Hansberg

    Nicholas Trachter 

    Chen Yeh

Abstract: It is known that firms primarily grow through adding establishments. We highlight two channels through which this growth occurs: de novo branching and grafting, the process of taking over another firm's establishments. We document several stylized facts using the National Establishment Time Series. First, grafting accounts for roughly 5% of establishment growth each year. Second, about 50% of large firm establishments were grafted over the life cycle of the firm. Third, firms that grow faster do so by grafting more. Fourth, large firms graft more from other large firms, and often graft from multiple firms within a given year. Last, firms that off-load their establishments don't always sell all of their establishments.