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Designing Optimal Disability Insurance: A Case for Asset Testing

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  • Mikhail Golosov
  • Aleh Tsyvinski

Abstract

We analyze an implementation of an optimal disability insurance system as a competitive equilibrium with taxes. An optimum is implemented by an asset-tested disability system in which a disability transfer is paid only if an agent has assets below a specified maximum. The logic behind this result is that an agent who plans to falsely claim disability (a) finds doing so unattractive if he does not adjust his savings and (b) cannot collect disability insurance if he does adjust his savings in the desired direction (upward). For a calibrated economy, we find that welfare gains from asset testing are significant.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 784828000000000450.

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Date of creation: 18 Sep 2005
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Handle: RePEc:cla:levrem:784828000000000450

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  1. David H. Autor & Mark G. Duggan, 2001. "The Rise in Disability Recipiency and the Decline in Unemployment," JCPR Working Papers 226, Northwestern University/University of Chicago Joint Center for Poverty Research.
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  3. Hugo Benitez-Silva & Moshe Buchinsky & Hiu Man Chan & Sofia Cheidvasser & John Rust, 2000. "How Large is the Bias is Self-Reported Disability?," NBER Working Papers 7526, National Bureau of Economic Research, Inc.
  4. J. A. Mirrlees & P. Diamond, 1982. "Social Insurance with Variable Retirement and Private Saving," Working papers 296, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  6. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Social Security in Theory and Practice (II): Efficiency Theories, Narrative Theories, and Implications for Reform," NBER Working Papers 7119, National Bureau of Economic Research, Inc.
  7. Wang, C. & Williamson, S., 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," GSIA Working Papers 1995-13, Carnegie Mellon University, Tepper School of Business.
  8. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  9. Hugo Benitez-Silva & Moshe Buchinsky & John Rust, 2005. "How Large are the Classification Errors in the Social Security Disability Award Process?," Department of Economics Working Papers 05-02, Stony Brook University, Department of Economics.
  10. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 03-95, Wharton School Rodney L. White Center for Financial Research.
  11. Narayana Kocherlakota, 2004. "Figuring out the Impact of Hidden Savings on Optimal Unemployment Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 541-554, July.
  12. Mikhail Golosov & Aleh Tsyvinski, 2005. "Optimal Taxation with Endogenous Insurance Markets," NBER Working Papers 11185, National Bureau of Economic Research, Inc.
  13. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  14. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February.
  15. Wang, Cheng & Williamson, Steve, 1996. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Staff General Research Papers 5088, Iowa State University, Department of Economics.
  16. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Staff Report 293, Federal Reserve Bank of Minneapolis.
  17. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-38, April.
  18. Abraham Arpad & Nicola Pavoni, 2004. "Efficient Allocations, with Moral Hazard and Hidden Borrowing and Lending," Levine's Bibliography 122247000000000138, UCLA Department of Economics.
  19. Rios-Rull, Jose-Victor, 1996. "Life-Cycle Economies and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 465-89, July.
  20. Martin Feldstein, 1985. "Should Social Security Be Means Tested?," NBER Working Papers 1775, National Bureau of Economic Research, Inc.
  21. Besley, Timothy & Coate, Stephen, 1995. "The Design of Income Maintenance Programmes," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 187-221, April.
  22. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
  23. J. A. Mirrlees, 1976. "Optimal Tax Theory: A Synthesis," Working papers 176, Massachusetts Institute of Technology (MIT), Department of Economics.
  24. Mikhail Golosov & Aleh Tsyvinski, 2003. "Designing Optimal Disability Insurance," Levine's Working Paper Archive 506439000000000217, David K. Levine.
  25. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December.
  26. Diamond, Peter A & Mirrlees, James A, 1986. " Payroll-Tax Financed Social Insurance with Variable Retirement," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 25-50.
  27. Bound, John & Burkhauser, Richard V., 1999. "Economic analysis of transfer programs targeted on people with disabilities," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 51, pages 3417-3528 Elsevier.
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