Social Insurance with Risk‐Reducing Investments

Dan Anderberg and Fredrik Andersson

Economica, 2000, vol. 67, issue 265, 37-56

Abstract: A two‐sector model with sector‐dependent disability risks is presented. Working in the low‐risk sector requires skills that can be obtained by investments in education. Moral hazard precludes full insurance. The labour force allocation is responsive to the incentives created by a social insurance system. The rationale for intervention lies in the government's power to cross‐subsidize between the sectors, and it is demonstrated how the responsiveness of the labour force allocation limits cross‐subsidization. The second‐best policy is time‐inconsistent. The consistent equilibrium is explored and is argued to provide weak incentives to reduce risks.

Date: 2000
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