Domain-Specific Risk and Public Policy

Ohto Kanninen, Petri Böckerman () and Ilpo Suoniemi

No 11539, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 (search for similar items in EconPapers)
JEL-codes: D02 H55 I13 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2018-05
New Economics Papers: this item is included in nep-hea, nep-ias, nep-lma and nep-upt
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Working Paper: Domain-specific risk and public policy (2018)
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