Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/180557 
Year of Publication: 
2018
Series/Report no.: 
IZA Discussion Papers No. 11539
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We develop a method to estimate domain-specific risk. We apply the method to sickness insurance by fitting a utility function at the individual level, using European survey data on life satisfaction. Three results stand out. First, relative risk aversion increases with income. Second, marginal utility is higher in the sick state conditional on income, due to an observed fixed cost of sickness. Third, the domain-specificity of risk shifts the focus on the smoothing of utility, not consumption. The optimal policy rule implies that the replacement rates should be non-linear and decrease with income.
Subjects: 
risk
risk aversion
state-dependence
social insurance
sickness absence
JEL: 
D02
H55
I13
Document Type: 
Working Paper

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