The Value of Dynamic Incentives in a Disability Model

This paper investigates a system of dynamic incentives developed within the framework of the classic Diamond and Mirrlees (1978) disability model, but considering disability as a temporary state and rephrasing the analysis in terms of current and promised future utilities. The model therefore assumes that if disabled individuals receive benefits to the extent that able individuals are indifferent between working and not working, then the marginal utility of consumption is lower for working individuals. A comparison, based on a numerical simulation, between the dynamic incentives (DI) model and a private savings (PS) model characterised by a stationary tax-transfer policy allows the assertion that, even if the first system converges to the second system, the total utility guaranteed by the government in the DI model is greater than the total value achieved by the PS model, and in the DI model, the gap in consumption between able and disabled individuals increases not only along working histories, as in the PS model, but also across working histories.