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Welfare and Output Enhancing Moral Hazard: Disability Benefits and Endogenous Occupational Choice

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One of the most prominent trends in OECD countries over the last 30 years has been the sharp increase in incidence of early retirement, and in particular the permanent take-up of disability benefits. In this paper we construct a theoretical model that shows how occupational choices, in terms of the associated health risks, made by the young can be affected by the expected provision of publicly funded disability benefits in later life. We find that because individuals are risk-averse, they take insufficient risks in the absence of insurance. Disability benefits lead to riskier aggregate behaviour, which in turn increases output and welfare at low levels of benefits, but will lead to excessive risk taking at high benefit levels to the detriment of output and welfare. We also show that the full impact of changes to the generosity of disability benefits in terms of increasing the take-up of such benefits is not immediate, but may take many years to realise because the previous career choices are largely irreversible. This time lag is consistent with the experiences of a number of countries over the last 30 years.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 445.

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Date of creation: 2001
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Handle: RePEc:qld:uq2004:445

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  1. COILE, Courtney & DIAMOND, Peter & GRUBER, Jonathan & JOUSTEN, Alain, 2000. "Delays in claiming social security benefits," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2000029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Kerkhofs, Marcel & Lindeboom, Maarten & Theeuwes, Jules, 1999. "Retirement, financial incentives and health," Labour Economics, Elsevier, Elsevier, vol. 6(2), pages 203-227, June.
  3. Lars Ljungqvist & Thomas J. Sargent, 1995. "The European unemployment dilemma," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 95-17, Federal Reserve Bank of Chicago.
  4. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(462), pages C1-33, March.
  5. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Buddelmeyer, Hielke, 2001. "Re-employment Dynamics of Disabled Workers," IZA Discussion Papers 269, Institute for the Study of Labor (IZA).
  7. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, Elsevier, vol. 57(1), pages 1-23, May.
  8. Boadway, Robin & Marceau, Nicolas & Sato, Motohiro, 1999. "Agency and the design of welfare systems," Journal of Public Economics, Elsevier, Elsevier, vol. 73(1), pages 1-30, July.
  9. Brent Kreider & Regina T. Riphahn, 2000. "Explaining Applications to the U.S. Disability System: A Semiparametric Approach," Journal of Human Resources, University of Wisconsin Press, vol. 35(1), pages 82-115.
  10. Ed Westerhout, 2001. "Disability Risk, Disability Benefits, and Equilibrium Unemployment," International Tax and Public Finance, Springer, Springer, vol. 8(3), pages 219-244, May.
  11. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 210, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Jonathan Gruber & David A. Wise, 1999. "Introduction to "Social Security and Retirement around the World"," NBER Chapters, National Bureau of Economic Research, Inc, in: Social Security and Retirement around the World, pages 1-35 National Bureau of Economic Research, Inc.
  13. Jon Harkness, 1993. "Labour Force Participation by Disabled Males in Canada," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 26(4), pages 878-89, November.
  14. Bound, John & Burkhauser, Richard V., 1999. "Economic analysis of transfer programs targeted on people with disabilities," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 51, pages 3417-3528 Elsevier.
  15. Gruber, Jonathan & Wise, David, 1998. "Social Security and Retirement: An International Comparison," American Economic Review, American Economic Association, American Economic Association, vol. 88(2), pages 158-63, May.
  16. John Bound & Timothy Waidmann, 2002. "Accounting for Recent Declines in Employment Rates among Working-Aged Men and Women with Disabilities," Journal of Human Resources, University of Wisconsin Press, vol. 37(2), pages 231-250.
  17. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number grub99-1.
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