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Life insurance and economic growth: Theoretical and empirical investigation

Hak Hong Soo, University of Nebraska - Lincoln

Abstract

Insurance provides various financial functions that affect our economic activities. This research study examines the relationship between life insurance and economic growth, theoretically and empirically, by studying the life insurance effect on three aspects of economic growth: (1) the effect of life insurance and an increase in life insurance premium tax rate on economic savings and consumption, (2) the role of life insurance in economic productivity, and (3) the causality feedback between life insurance growth and economic growth. Results suggest that growth in the life insurance industry causes an increase in economic growth. I develop a dynamic optimization model to determine the effect of life insurance in individuals' process of maximizing their expected life-time utility. I conclude that the availability of tax-loaded life insurance affects the accumulation process of individual wealth, but not aggregate wealth. The theoretical model also suggests that a permanent increase in the annuity premium tax rate in a lending economy decreases the steady state aggregate consumption and aggregate wealth. However, the dynamic effect of a permanent increase in the insurance premium tax rate in a borrowing economy on the steady state equilibrium is undetermined. Empirically, I find evidence suggesting that growth in the life insurance industry has contributed to productivity growth and economic growth. Also, the hypothesis that life insurance growth Granger-causes economic growth is supported. The conditional directional feedback from life insurance growth to economic growth suggests that life insurance growth explains approximately 14% of the variance in economic growth. I find that a unit shock in life insurance growth has a positive impact on economic growth in both the short-run and the long-run. I also find that a unit shock in the insurance premium tax rate has a positive impact on economic growth but a negative impact on life insurance growth in the short-run.

Subject Area

Economic theory|Finance

Recommended Citation

Soo, Hak Hong, "Life insurance and economic growth: Theoretical and empirical investigation" (1996). ETD collection for University of Nebraska - Lincoln. AAI9712527.
https://digitalcommons.unl.edu/dissertations/AAI9712527

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