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Optimal Social Security with Imperfect Tagging

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Author Info

  • Oliver Denk

    (OECD - Economics Department and CEPII)

  • Jean-Baptiste Michau

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

Abstract

Workers are exposed to the risk of permanent disability. We rely on a dynamic mechanism design approach to determine how imperfect information on health should optimally be used to improve the trade-off between inducing the able to work and providing insurance against disability. After deriving the fi rst-order conditions to this problem, we calibrate the model to the U.S. economy and run a numerical simulation. The government should offer back-loaded incentives and make strategic use of the difference between the age at which disability occurs and the age of eligibility to disability bene ts. Also, the able who are (mistakenly) tagged as disabled should be encouraged to work until some early retirement age. This makes a decrease in the strictness of the disability test desirable which would reduce the number of disabled who are not awarded the tag and, hence, improve insurance. Finally, we show how the first-best allocation of resources can asymptotically be implemented by making strategic use of the disability test.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00796521.

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Date of creation: 04 Mar 2013
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Handle: RePEc:hal:wpaper:hal-00796521

Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00796521
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Related research

Keywords: Disability insurance; Imperfect tagging; Optimal policy; Social Security;

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References

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  1. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 569-587, 07.
  2. Jean-Baptiste Michau, 2011. "Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective," Working Papers hal-00639121, HAL.
  3. N. Gregory Mankiw & Matthew Weinzierl, 2009. "The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution," NBER Working Papers 14976, National Bureau of Economic Research, Inc.
  4. David H. Autor & Mark G. Duggan, 2006. "The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 71-96, Summer.
  5. Alberto Alesina & Andrea Ichino & Loukas Karabarbounis, 2007. "Gender Based Taxation and the Division of Family Chores," NBER Working Papers 13638, National Bureau of Economic Research, Inc.
  6. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  7. Finkelstein, Amy & Luttmer, Erzo F. P. & Notowidigdo, Matthew J., 2008. "What Good Is Wealth without Health? The Effect of Health on the Marginal Utility of Consumption," Working Paper Series rwp08-036, Harvard University, John F. Kennedy School of Government.
  8. Borys Grochulski & Narayana Kocherlakota, 2007. "Nonseparable Preferences and Optimal Social Security Systems," NBER Working Papers 13362, National Bureau of Economic Research, Inc.
  9. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers 210, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Albanesi, Stefania & Sleet, Christopher, 2003. "Dynamic Optimal Taxation with Private Information," CEPR Discussion Papers 4006, C.E.P.R. Discussion Papers.
  11. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
  12. Rios-Rull, Jose-Victor, 1996. "Life-Cycle Economies and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 465-89, July.
  13. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  14. Salanie, Bernard, 2002. "Optimal demogrants with imperfect tagging," Economics Letters, Elsevier, vol. 75(3), pages 319-324, May.
  15. 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.
  16. 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.
  17. Parsons, Donald O., 1996. "Imperfect 'tagging' in social insurance programs," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 183-207, October.
  18. Mirrlees, J A, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 3-21, January.
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Citations

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Cited by:
  1. Hamish Low & Luigi Pistaferri, 2010. "Disability risk, disability insurance and life cycle behavior," IFS Working Papers W10/11, Institute for Fiscal Studies.
  2. Jean-Baptiste Michau, 2011. "Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective," Working Papers hal-00639121, HAL.
  3. Michau, Jean-Baptiste, 2014. "Optimal redistribution: A life-cycle perspective," Journal of Public Economics, Elsevier, vol. 111(C), pages 1-16.

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