Regulation , Capital Structure and Organizational Form in U . S . Life Insurance

This paper studies organizational form choice in the life insurance industry between 1900 and 1949. It questions the prevailing wisdom about the decline of the mutual—that consumer protection regulation enabled the stock ...rm to rise by engendering consumer con...dence. Instead, the evidence suggests that 1) organizational form choices were made with an eye to avoiding regulation when possible, and 2) regulation favored the stock form by requiring large deposits or minimum capital from start-up companies, which were di¢cult for mutual companies to provide. The paper models the mutual’s disadvantage in raising capital, showing the theoretical in‡uence of capital considerations on form choice at incorporation time. This helps to explain the in‡uence of regulation evident in the data, as well as the connection between “tight” capital market conditions and mutuality. ¤I thank Gary Becker, Pierre-Andre Chiappori, Ken Garbade, Charlie Himmelberg, Jim Mahoney, Anup Malani, Hamid Mehran, Tomas Philipson, and seminar participants at the Federal Reserve Bank of New York for helpful comments and discussions. Errors are mine. The views expressed in this article are those of the author and do not necessarily re‡ect the position of the Federal Reserve Bank of New York or the Federal Reserve System.