By Amanda Michaud and Davic Wiczer
Using retrospective data, we introduce evidence that occupational exposure significantly affects disability risk. Incorporating this into a general equilibrium model, social disability insurance (SDI) affects welfare through (i) the classic, risk-sharing channel and (ii) a new channel of occupational reallocation. Both channels can increase welfare, but at the optimal SDI they are at odds. Welfare gains from additional risk-sharing are reduced by overly incentivizing workers to choose risky occupations. In a calibration, optimal SDI increases welfare by 2.3% relative to actuarially fair insurance, mostly due to risk sharing.
This is the classic insurance conundrum: it enhances welfare through risk-sharing, but also reduces it through encouraging risk-taking. Here it is with disability insurance that influences occupational choice. In the paper, the disability is expressed as not being able to general labor income. I wonder if accounting for the physical hurt of a disability would significantly affect the outcome. I can understand that this is difficult to model and calibrate, though.
[a previous version of this post had the wrong paper title]