Designing Optimal Disability Insurance: A Case for Asset Testing

47 Pages Posted: 25 May 2006 Last revised: 29 Dec 2022

See all articles by Mikhail Golosov

Mikhail Golosov

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); New Economic School (NES)

Aleh Tsyvinski

Yale University - Cowles Foundation; Yale University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2004

Abstract

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.

Suggested Citation

Golosov, Mikhail (Mike) and Tsyvinski, Aleh and Tsyvinski, Aleh, Designing Optimal Disability Insurance: A Case for Asset Testing (September 2004). NBER Working Paper No. w10792, Available at SSRN: https://ssrn.com/abstract=595191

Mikhail (Mike) Golosov

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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New Economic School (NES) ( email )

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Aleh Tsyvinski (Contact Author)

Yale University - Cowles Foundation ( email )

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Yale University ( email )

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