Competition between jurisdictions is a central feature of many public policy problems. I examine the consequences of such competition in the US life insurance industry, where states vie to attract insurers by setting lower capital requirements, but the costs of such actions are borne by consumers in other states. I document empirical evidence of competition between state regulators and its effects on the supply of life insurance. I then develop a quantitative model of the insurance market to evaluate the effects of this competition. I find that competition leads regulators to set lower capital requirements, which increases default risks but also increases consumer surplus by lowering prices. On net, these effects decrease regulators’ utility based on regulators’ revealed-preference objective functions. *
[email protected]. Harvard University. I am deeply grateful to my advisors Andrei Shleifer, Jeremy Stein, Adi Sunderam, and Mark Egan. I have also benefited from conversations with Sam Antill, John Campbell, Antonio Coppola, Paul Fontanier, Shan Ge, Nicola Gennaioli, Ed Glaeser, Martin Grace, Robin Greenwood, Sam Hanson, Nathan Hendren, Myrto Kalouptsidi, Elisabeth Kempf, Spencer Kwon, Robin Lee, Yueran Ma, Ariel Pakes, Dev Patel, Gordon Phillips, Ken Rogoff, David Scharfstein, Dan Schwarcz, Ishita Sen, Jesse Shapiro, Emil Siriwardane, Stefanie Stantcheva, Ludwig Straub, Boris Vallee, Jonathan Wallen, Ron Yang, David Zhang, and audiences at TADC, USC Marshall Finance PhD Conference, Bank of Canada, and the Harvard finance, IO, and labor/public finance workshops. A.M. Best Company, S&P, and Compulife own the copyrights to the respective data. I thank the staff and regulators at state insurance departments, actuaries and insurance agents, and industry consultants for many helpful conversations. I acknowledge funding from the John M. Olin Fellowship at Harvard Law School. All errors are my own.