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Optimal Social Insurance with Endogenous Health

  • Tobias Laun

    (Stockholm School of Economics)

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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File URL: https://www.economicdynamics.org/meetpapers/2012/paper_438.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 438.

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Date of creation: 2012
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Handle: RePEc:red:sed012:438
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  1. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
  2. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
  3. 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.
  4. Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
  5. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  6. 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.
  7. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  8. Lisa Jönsson & Mårten Palme & Ingemar Svensson, 2011. "Disability Insurance, Population Health and Employment in Sweden," NBER Working Papers 17054, National Bureau of Economic Research, Inc.
  9. Marcus Hagedorn & Ashok Kaul, 2004. "An Adverse Selection Model of Optimal Unemployment Insurance," 2004 Meeting Papers 331, Society for Economic Dynamics.
  10. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
  11. 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.
  12. Karlström, Anders & Palme, Mårten & Svensson, Ingemar, 2008. "The Employment Effect of Stricter Rules for Eligibility for DI: Evidence from a Natural Experiment in Sweden," Research Papers in Economics 2008:3, Stockholm University, Department of Economics.
  13. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
  14. 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.
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