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Designing Optimal Disability Insurance: A Case for Asset Testing

  • Mikhail Golosov
  • Aleh Tsyvinski

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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File URL: http://dx.doi.org/10.1086/500549
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 114 (2006)
Issue (Month): 2 (April)
Pages: 257-279

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Handle: RePEc:ucp:jpolec:v:114:y:2006:i:2:p:257-279
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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  1. Abraham, Arpad & Pavoni, Nicola, 2004. "Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending," Working Papers 04-05, Duke University, Department of Economics.
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  17. repec:oup:restud:v:62:y:1995:i:2:p:187-221 is not listed on IDEAS
  18. Mikhail Golosov & Aleh Tsyvinski, 2003. "Designing Optimal Disability Insurance," Levine's Working Paper Archive 506439000000000217, David K. Levine.
  19. 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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