operations is costly, and that firms cannot add capital after claims are realized. In the
event of insolvency, Munch and Smallwood (1982) assume a loss of goodwill. Finsinger
and Pauly (1984) assume loss of an entry cost that otherwise would allow the firm to
continue operating (also see Tapiero et al., 1978). In both models firms will commit
capital ex ante to reduce the likelihood of insolvency.
55
Doherty and Tinic (1981), Doherty (1989, 2000), and Tapiero et al. (1986) consider
insurers’ capital decisions when demand for coverage is sensitive to insolvency risk.
Garven (1987) analyzes insolvency r
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