Designing optimal disability insurance: exploring the implications of asset testing

Louw, Nikolai (2012). Designing optimal disability insurance: exploring the implications of asset testing Honours Thesis, School of Economics, The University of Queensland.

       
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Author Louw, Nikolai
Thesis Title Designing optimal disability insurance: exploring the implications of asset testing
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2012-11
Thesis type Honours Thesis
Supervisor BegoƱa Dominguez
Total pages 69
Language eng
Subjects 14 Economics
Formatted abstract

This thesis investigates and critically evaluates the claim of Golosov and Tsyvinski (2006) that asset testing disability insurance (DI) will result in a significant welfare gains. In their paper, Designing Optimal Disability Insurance: A Case for Asset Testing, Golosov and Tsyvinski analyse the implementation of an optimal disability insurance system as a competitive equilibrium with taxes. They find that asset testing implements the optimum by preventing agents from falsely claiming DI. This is because an agent who plans to falsely claim cannot collect DI if he adjusts his savings upwards in anticipation of falsely claiming. The purpose of this thesis is to further explore the effects of asset testing on savings and welfare in a two-period setting, building on the two-period model presented in Golosov and Tsyvinski (2006). I adapt their model to the Australian context and extend on this model to include factors which Golosov and Tsyvinski do not consider: heterogeneity in ex-ante income, discount factor and risk aversion. I also extend on the brief analysis of a DI screening program provided in the supplement to their main paper. I find that the welfare gains of asset testing may not be as significant as Golosov and Tsyvinski claim. 


 
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