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Optimal Social Insurance with Endogenous Health

  • Laun, Tobias

    ()

    (Department of Economics, Uppsala University)

This paper analyzes optimal insurance against unemployment and disability in a private information economy with endogenous health and search effort. Individuals can reduce the probability of becoming disabled by exerting, so-called, prevention effort, which is costly in terms of utility. A healthy, i.e., not disabled, individual either works or is unemployed. An unemployed individual can exert search effort in order to increase the probability of finding a new job. I show that the optimal sequence of consumption is increasing for a working individual and constant for a disabled individual. During unemployment, decreasing benefits are not necessarily optimal in this setting. The prevention constraint implies increasing benefits over time while the search constraint demands decreasing benefits while being unemployed. However, if individuals respond sufficiently much to search incentives, the latter effect dominates the former and the optimal consumption sequence is decreasing during unemployment.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 742.

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Length: 29 pages
Date of creation: 09 Mar 2012
Date of revision: 28 Apr 2012
Handle: RePEc:hhs:hastef:0742
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  1. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  2. Laura Larsson, 2006. "Sick of Being Unemployed? Interactions between Unemployment and Sickness Insurance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 97-113, 03.
  3. Mikhail Golosov & Aleh Tsyvinski, 2004. "Designing Optimal Disability Insurance: A Case for Asset Testing," NBER Working Papers 10792, National Bureau of Economic Research, Inc.
  4. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  5. Marcus Hagedorn & Ashok Kaul, 2004. "An Adverse Selection Model of Optimal Unemployment Insurance," Computing in Economics and Finance 2004 154, Society for Computational Economics.
  6. Jönsson, Lisa & Palme, Mårten & Svensson, Ingemar, 2010. "Disability Insurance, Population Health and Employment in Sweden," Research Papers in Economics 2010:25, Stockholm University, Department of Economics.
  7. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December.
  8. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  9. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  10. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
  11. Nicola Pavoni & Giovanni L. Violante, 2005. "Optimal welfare-to-work programs," Discussion Paper / Institute for Empirical Macroeconomics 143, Federal Reserve Bank of Minneapolis.
  12. Fredriksson, Peter & Holmlund, Bertil, 2001. "Optimal Unemployment Insurance in Search Equilibrium," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 370-99, April.
  13. Karlström, Anders & Palme, Mårten & Svensson, Ingemar, 2008. "The employment effect of stricter rules for eligibility for DI: Evidence from a natural experiment in Sweden," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2071-2082, October.
  14. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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