Agenda

Laura Jansen (University of Groningen) - A model of employer and employee moral hazard in optimal disability insurance

Abstract:

In this paper, I develop a welfare model of disability insurance (DI) that considers both employee and employer moral hazard. I extend the Diamond-Sheshinski (1995) model with an employer side to analyze the welfare consequences of an employer incentive in DI, experience rating. Experience rating links the insurance premiums paid by firms to their (former) employees’ DI costs. I derive welfare-maximizing conditions for three key DI policy parameters, not only experience rating but also the disability benefit level and the strictness of the disability screening process. The optimal level of experience rating balances two counteracting effects: it encourages firms to accommodate their workers more (reduction in employer moral hazard), leading to fewer people applying to DI (reduction in employee moral hazard), while it also reduces overall employment because more firms go out of business due to high labor costs. I derive that while experience rating can improve welfare, this is not always unambiguously the case.

The seminar can be attended also remotely, connecting to ZOOM.

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