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Optimal Social Insurance with Endogenous Health

Author

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  • Tobias Laun

    (Stockholm School of Economics)

Abstract

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.

Suggested Citation

  • Tobias Laun, 2012. "Optimal Social Insurance with Endogenous Health," 2012 Meeting Papers 438, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:438
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    References listed on IDEAS

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    1. Lisa Jönsson & Mårten Palme & Ingemar Svensson, 2012. "Disability Insurance, Population Health, and Employment in Sweden," NBER Chapters,in: Social Security Programs and Retirement around the World: Historical Trends in Mortality and Health, Employment, and Disability Insurance Participatio, pages 79-126 National Bureau of Economic Research, Inc.
    2. 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.
    3. Joskow, Paul L & Rozanski, George A, 1979. "The Effects of Learning by Doing on Nuclear Plant Operating Reliability," The Review of Economics and Statistics, MIT Press, pages 161-168.
    4. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, pages 295-336.
    5. 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.
    6. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, pages 283-318.
    7. Lennart Erixon, 2010. "The Rehn-Meidner Model in Sweden: Its Rise, Challenges and Survival," Journal of Economic Issues, Taylor & Francis Journals, pages 677-715.
    8. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, pages 1612-1630.
    9. 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, pages 2071-2082.
    10. Chang, Roberto, 1998. "Credible Monetary Policy in an Infinite Horizon Model: Recursive Approaches," Journal of Economic Theory, Elsevier, vol. 81(2), pages 431-461, August.
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    Citations

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    Cited by:

    1. Harold L. Cole & Soojin Kim & Dirk Krueger, 2012. "Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs," NBER Working Papers 18572, National Bureau of Economic Research, Inc.
    2. Wang, C. & Williamson, S., 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," GSIA Working Papers 1995-13, Carnegie Mellon University, Tepper School of Business.
    3. Paramsothy Silvapulle, 2001. "A Score Test For Seasonal Fractional Integration And Cointegration," Econometric Reviews, Taylor & Francis Journals, pages 85-104.
    4. Laun, Tobias & Wallenius, Johanna, 2015. "A life cycle model of health and retirement: The case of Swedish pension reform," Journal of Public Economics, Elsevier, pages 127-136.
    5. Laun, Tobias & Wallenius, Johanna, 2015. "A life cycle model of health and retirement: The case of Swedish pension reform," Journal of Public Economics, Elsevier, pages 127-136.
    6. Stephen Williamson & Cheng Wang, 1995. "Unemployment Insurance with Moral Hazard in a Dynamic Economy," Macroeconomics 9506002, EconWPA.
    7. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 1-41.
    8. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 1-41.

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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