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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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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
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