Designing optimal disability insurance: A case for asset testing

Mikhail Golosov, Aleh Tsyvinski

Research output: Contribution to journalArticle

79 Scopus citations

Abstract

We analyze an implementation of an optimal disability insurance system as a competitive equilibrium with taxes. An optimum is implemented by an asset-tested disability system in which a disability transfer is paid only if an agent has assets below a specified maximum. The logic behind this result is that an agent who plans to falsely claim disability (a) finds doing so unattractive if he does not adjust his savings and (b) cannot collect disability insurance if he does adjust his savings in the desired direction (upward). For a calibrated economy, we find that welfare gains from asset testing are significant.

Original languageEnglish (US)
Pages (from-to)257-279
Number of pages23
JournalJournal of Political Economy
Volume114
Issue number2
DOIs
StatePublished - Apr 1 2006

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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