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Occupational Hazards and Social Disability Insurance

Lifetime occupational exposure accounts for 42% of differences in disability risk across individuals. Incorporating this feature into a general equilibrium model, we study how social disability insurance (SDI) affects welfare through (i) the classic channel of risk-sharing 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 calibrated economy resembling the United States, SDI increases welfare by 2.6% (consumption) relative to actuarially fair insurance. The current US system captures 92% of these gains.

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