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

This paper studies stock and mutual life insurance company formations in the first half of the 20th century. A common belief is that the growth of state consumer protection regulation rendered the mutual form irrelevant, but the paper finds little evidence connecting such regulation with declines in the form’s popularity. The exception is the initial capital requirement. Mutuals were formed almost exclusively in states with 1) low initial capital requirements for mutuals and 2) high initial capital requirements for stock firms. This suggests that the mutual form’s disadvantage in raising capital, in conjunction with rising capital requirements and the elimination of differentials between the requirements for stock and mutual firms, may have contributed to the decline in popularity with entrepreneurs. These findings are supported with a model of organizational form choice, which also helps to explain the observed reversion toward the mutual form during “hard times.” ∗I thank Gary Becker, Pierre-Andre Chiappori, Ken Garbade, Charlie Himmelberg, Jim Mahoney, Anup Malani, Hamid Mehran, Tomas Philipson, Jennifer Simon, and seminar participants at the Federal Reserve Bank of New York, the University of Chicago, and Wharton for helpful comments and discussions. Errors are mine. The views expressed in this article are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.