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Domain-Specific Risk and Public Policy

Author

Listed:
  • Kanninen, Ohto

    () (Labour Institute for Economic Research)

  • Böckerman, Petri

    () (Labour Institute for Economic Research)

  • Suoniemi, Ilpo

    () (Labour Institute for Economic Research)

Abstract

We develop a method to estimate domain-specific risk. We apply the method to sickness insurance by fitting a utility function at the individual level, using European survey data on life satisfaction. Three results stand out. First, relative risk aversion increases with income. Second, marginal utility is higher in the sick state conditional on income, due to an observed fixed cost of sickness. Third, the domain-specificity of risk shifts the focus on the smoothing of utility, not consumption. The optimal policy rule implies that the replacement rates should be non-linear and decrease with income.

Suggested Citation

  • Kanninen, Ohto & Böckerman, Petri & Suoniemi, Ilpo, 2018. "Domain-Specific Risk and Public Policy," IZA Discussion Papers 11539, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp11539
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    More about this item

    Keywords

    risk; risk aversion; state-dependence; social insurance; sickness absence;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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