Social Insurance with Risk-Reducing Investments
Dan Anderberg () and
Fredrik Andersson ()
Economica, 2000, vol. 67, issue 265, 37-56
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. Copyright 2000 by The London School of Economics and Political Science
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