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Gruber (2000) found evidence that the elasticity of labour supply concerning disability insurance benefits is considerably smaller than the estimates of the elasticity of unemployment durations concerning unemployment insurance benefits. Why might moral hazard be less of an issue in the disability insurance program than in the unemployment insurance program?

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Nusrat Fatima
Nusrat FatimaLv10
28 Sep 2019

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Related questions

Long term disability (LTD) insurance policies cover workers who become disabled and can no longer perform their job functions. Workers who think they qualify as disabled can submit a claim to their employer for LTD payments to replace their lost wages.

Below is an excerpt of the abstract of a recent NBER working paper entitled a Moral Hazard and Claims Deterrence in Private Disability Insurance by David Autor, Mark Duggan, and Jonathan Gruber:

We provide a detailed analysis of the incidence, duration and determinants of claims made on private Long Term Disability (LTD) policies using a database of approximately 10,000 policies and 1 million workers from a major LTD insurer.. . . we find that a higher [wage] replacement rate and a shorter waiting time to benefits receipt . . . significantly increase the likelihood that workers claim LTD.

(a) Higher disability claim rates when LTD benefits are more favourable may be an instance of moral hazard. Any instance of moral hazard involves a price distortion, a behaviour response, and an information asymmetry. What is the price distortion in this example?

(b) What is the purported behaviour response?

(c) What is the nature of the information asymmetry? Explain what would happen if this information asymmetry did not exist.

(d) If the higher wage replacement rate and shorter waiting time policies had been applied randomly to different workers in this sample, then the finding would be convincing evidence of moral hazard. Explain how the same result could have been found even if there was no moral hazard (that is, no behaviour response to the price distortion)?

The empirical evidence on unemployment spell durations suggests that workers who leave unemployment earlier (that is, find or take a job sooner) have no higher post unemployment wages than do workers who leave unemployment later.

a. This result could be interpreted as evidence that the quality of the job match does not improve as the unemployment spell grows longer. What does this interpretation of the evidence imply about the moral hazard costs of UI?

b. An alternative explanation for this evidence is that workers with longer unemployment spells are less qualified than are workers with shorter unemployment spells. How could you empirically distinguish between this explanation and the explanation put forth in part a?

Research the current problem in Greece (I suggest a Wall Street Journal, for example). Relate the options available to creditor countries like Germany to the notion of MORAL HAZARD.

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

For example, an individual with insurance against automobile theft may be less vigilant about locking his car, because the negative consequences of automobile theft are (partially) borne by the insurance company.

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