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Optimal Partial and Full Disability Insurance with an Application to Korea

Author

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  • Kyung-woo Lee

    (Yonsei University)

Abstract

In this paper, I investigate the optimal disability insurance (DI) when partial and full disability are privately observed over the life cycle. I demonstrate that in the social optimum, partially disabled agents are induced to supply labor despite substantial government transfers unless labor supply is relatively elastic and their productivity is significantly reduced. I then apply the framework to quantitatively evaluate Korea’s DI programs, which include partial and full disability benefits. In the calibrated model, I find that welfare gains from replacing Korea’s DI programs with the corresponding optimal system amount to a 1.17% increase in consumption. Such a reform significantly raises the utility of both types of disabled agents at relatively small utility costs of able agents. Equity gains from this redistribution account for 73.4% of the total welfare gains, whereas efficiency gains from the optimal allocation account for 26.6%.

Suggested Citation

  • Kyung-woo Lee, 2019. "Optimal Partial and Full Disability Insurance with an Application to Korea," Korean Economic Review, Korean Economic Association, vol. 35, pages 61-107.
    • Handle: RePEc:kea:keappr:ker-20190101-35-1-03
    as

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    References listed on IDEAS

    as
    1. Matthew Weinzierl, 2011. "The Surprising Power of Age-Dependent Taxes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(4), pages 1490-1518.
    2. Na Yin, 2015. "Partial Benefits in the Social Security Disability Insurance Program," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 82(2), pages 463-504, June.
    3. Narayana R. Kocherlakota, 2010. "The New Dynamic Public Finance," Economics Books, Princeton University Press, edition 1, number 9222, December.
    4. Kitao, Sagiri, 2014. "A life-cycle model of unemployment and disability insurance," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 1-18.
    5. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    6. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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