Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements

Abstract

Cost functions for the for 561 firms representing approximately 65 percent of the industry's premiums written over the period, were presented. The cost function residuals were then employed to construct a measure of firm efficiency. The results of the research provided a number of policy questions. First, does advertising cause policy holders to switch firms or does it cause those without insurance to purchase it? Second, does superior regulation actually increase efficiency? Third, what are the value of bureaus and associations? This research study links firm efficiency to institutional and economic conditions in the U.S. life insurance industry and finds that there are several economic and regulatory variables that influence firm efficiency.