Domain-Specific Risk and Public Policy

53 Pages Posted: 30 May 2018

See all articles by Ohto Kanninen

Ohto Kanninen

Labour Institute for Economic Research

Petri Bockerman

University of Turku - Turku School of Economics; Labour Institute for Economic Research

Ilpo Suoniemi

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.

Keywords: risk, risk aversion, state-dependence, social insurance, sickness absence

JEL Classification: D02, H55, I13

Suggested Citation

Kanninen, Ohto and Bockerman, Petri and Bockerman, Petri and Suoniemi, Ilpo, Domain-Specific Risk and Public Policy. Available at SSRN: https://ssrn.com/abstract=3185232 or http://dx.doi.org/10.2139/ssrn.3185232

Ohto Kanninen (Contact Author)

Labour Institute for Economic Research ( email )

FIN-00530 Helsinki
Finland

Petri Bockerman

University of Turku - Turku School of Economics ( email )

Rehtorinpellonkatu 3
TURKU, FI-20500
Finland

Labour Institute for Economic Research ( email )

FIN-00530 Helsinki
Finland
+358 9 2535 7332 (Phone)
+358 9 2535 7332 (Fax)

HOME PAGE: http://www.petribockerman.fi/

Ilpo Suoniemi

Labour Institute for Economic Research ( email )

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