Designing Optimal Disability Insurance: A Case for Asset Testing / Mikhail Golosov, Aleh Tsyvinski.

Format:

Book

Author/Creator:

Golosov, Mikhail.

Contributor:

National Bureau of Economic Research.

Tsyvinski, Aleh.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10792.

NBER working paper series no. w10792

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Designing Optimal Disability Insurance

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

The paper analyzes an implementation of an optimal disability insurance system as a competitive equilibrium with taxes. The problem is modeled as a dynamic mechanism design problem in which disability is unobservable. We show that an asset-tested disability system in which a disability transfer is paid only if an agent has assets below a specified maximum implements the optimum. The logic behind the result is as follows: we show that an agent who falsely claims disability has higher savings than a truly disabled agent, and an asset test prevents false claimants from receiving disability. We also evaluate welfare benefits of asset testing. For a calibrated economy, we numerically compare the optimal system to the best system without asset testing. We find that gains of asset testing are significant and equal to about 0.65% of consumption.

Notes:

Print version record

September 2004.