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Optimal Social Insurance: Insights from a Continuous-Time Stochastic Setup

Author

Listed:
  • João Amador
  • Pedro G. Rodrigues

Abstract

This paper focuses on the determinants of the optimal level of social insurance, thus contributing to explain its cross-country variation. In a continuous-time stochastic endogenous growth setup, it is a form of public insurance against idiosyncratic shocks affecting the income, as well as the dependency ratio of an individual household. Such shocks include, for example, illness, disability, unemployment, or changes in the number of infants and elderly in care. We conclude that a higher average dependency ratio and a higher covariance between technological and dependency shocks both decrease the optimal amount of social insurance. In addition, a higher variance of technological shocks does not affect optimal decisions, while a higher variance of dependency shocks increases optimal social insurance, provided the covariance between technological and dependency shocks is not very negative.

Suggested Citation

  • João Amador & Pedro G. Rodrigues, 2021. "Optimal Social Insurance: Insights from a Continuous-Time Stochastic Setup," Working Papers w202101, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202101
    as

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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp202101.pdf
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    References listed on IDEAS

    as
    1. Wasseem Mina, 2018. "The Determinants of Social Protection Expenditures and Labor Market Flexibility," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1810, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    2. Robert C. Merton & Zvi Bodie & Alan Marcus, 1987. "Pension Plan Integration As Insurance Against Social Security Risk," NBER Chapters, in: Issues in Pension Economics, pages 147-172, National Bureau of Economic Research, Inc.
    3. Gary S. Fields & Olivia S. Mitchell, 1984. "Retirement, Pensions, and Social Security," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262060914, December.
    4. Peter A. Diamond & James Mirrlees, 1985. "Insurance Aspects of Pensions," NBER Chapters, in: Pensions, Labor, and Individual Choice, pages 317-356, National Bureau of Economic Research, Inc.
    5. Di Gioacchino, Debora & Sabani, Laura & Tedeschi, Simone, 2014. "Preferences for social protection: Theory and empirics," Economic Modelling, Elsevier, vol. 36(C), pages 629-644.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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