TY  - JOUR
AU  - Golosov,Mikhail
AU  - Tsyvinski,Aleh
TI  - Designing Optimal Disability Insurance: A Case for Asset Testing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10792
PY  - 2004
Y2  - September 2004
UR  - http://www.nber.org/papers/w10792
L1  - http://www.nber.org/papers/w10792.pdf
N1  - Author contact info:
Mikhail Golosov
Department of Economics
Princeton University
111 Fisher Hall
Princeton, NJ 08544
Tel: 609/258-4003
Fax: 609/258-6419
E-Mail: golosov@princeton.edu

Aleh Tsyvinski
Department of Economics
Yale University
Box 208268
New Haven, CT  06520-8268
E-Mail: a.tsyvinski@yale.edu
AB  - 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.
ER  -