Working Paper: NBER ID: w18433
Authors: Raj Chetty; Amy Finkelstein
Abstract: We survey the literature on social insurance, focusing on recent work that has connected theory to evidence to make quantitative statements about welfare and optimal policy. Our review contains two parts. We first discuss motives for government intervention in private insurance markets, focusing primarily on selection. We review the original theoretical arguments for government intervention in the presence of adverse selection, and describe how recent work has refined and challenged the conclusions drawn from early theoretical models. We then describe empirical work that tests for selection in insurance markets, documents the welfare costs of this selection, and analyzes the welfare consequences of potential public policy interventions. In the second part of the paper, we review work on optimal social insurance policies. We discuss formulas for the optimal level of insurance benefits in terms of empirically estimable parameters. We then consider the consequences of relaxing the key assumptions underlying these formulas, e.g., by allowing for fiscal externalities or behavioral biases. We also summarize recent work on other dimensions of optimal policy, including mandated savings accounts and the optimal path of benefits. Finally, we discuss the key challenges that remain in understanding the optimal design of social insurance policies.
Keywords: Social Insurance; Adverse Selection; Welfare Economics; Public Policy
JEL Codes: H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adverse selection (D82) | welfare loss (D69) |
| government intervention (O25) | welfare improvement (I38) |
| mandating insurance coverage (G52) | welfare improvement (I38) |
| equilibrium share of individuals buying insurance (G52) | efficient allocation (D61) |
| average cost pricing (D40) | underinsurance (G52) |
| introduction of loads (Y20) | efficiency of insurance provision (G52) |
| preference heterogeneity (D11) | advantageous selection (C52) |
| advantageous selection (C52) | overinsurance (G52) |
| government intervention (O25) | welfare implications (I30) |