Ed Westerhout

Disability Risk, Disability Benefits, and Equilibrium Unemployment

This paper analyses the labour market and efficiency effects of various kinds of disability policies. It therefore extends Pissarides (1990) model of equilibrium unemployment with disability risk and disability benefits and allows for the improper use of disability schemes by the unemployed. The paper finds that recognition of this improper use can reverse the ranking of policies. In addition, it concludes that disability policies that reduce the participation in disability schemes tend to increase the rate of official unemployment. Only policies that lower the rate of disability shocks succeed to reduce both the participation in disability and unemployment schemes.

Towards an economic model of the Dutch health care sector

This paper describes the construction of a model of the Dutch health care sector. It discusses the behaviour of patients, general practitioners, medical specialists and hospital managers. It also analyses the various ways the actors interact, such as general practitioners supplying the services demanded by patients, specialists dispatching referrals made by general practitioners or hospital managers boosting output to match an increasing amount of specialist services. Numerical simulations illustrate the various mechanisms in the model.

Intergenerational Risk Sharing and Endogenous Labour Supply within Funded Pension Schemes

Funded defined-benefit pensions add to welfare on account of providing intergenerational risk sharing, but lower it on account of inducing labour supply distortions. We show that a properly designed funded defined-benefit pension scheme involves a welfare improvement even if contributions are distortionary and even if individuals face potentially correlated wage and equity risks. Numerical calculations indicate that diversification gains from risk sharing are large compared to the losses related to labour supply distortions. This result withstands a number of extensions, like the introduction of a short-sale constraint for individuals or the inclusion of a labour income tax.

The Capital Tax and Welfare Effects from Asymmetric Information on Equity Markets

This paper explores the implications of informational asymmetries between domestic and foreign investors for optimal capital tax rates and welfare. It adopts a model in which asymmetric information implies a home bias in equity. The paper finds that asymmetric information may raise capital tax rates by reducing the marginal cost of taxation. Furthermore, it shows that investors may gain from informational asymmetries. Although asymmetric information increases the uncertainty as perceived by investors, it may also increase tax rates and allow for a higher consumption of public goods. This reflects that asymmetric information may reduce the distortionary effects of competition among governments.

Defined Benefit Pension Schemes: A Welfare Analysis of Risk Sharing and Labour Market Distortions

This CPB Discussion Paper addresses two policy questions with respect to public defined benefit (DB) pension schemes. Firstly, does a funded DB pension scheme increase welfare? Secondly, how large is the commitment problem of pension funds after an adverse capital market shock? This CPB Discussion Paper addresses two policy questions with respect to public defined benefit (DB) pension schemes: Firstly, does a funded DB pension scheme increase welfare? In other words: do the gains from intergenerational sharing of capital market risks outweigh the labour market distortions from pension schemes? Secondly, how large is the commitment problem of pension funds after an adverse capital market shock? The answer to the first question depends on the used welfare measure. If we use risk-neutral weights to aggregate the equivalent variations of different generations in different states of nature then a DB pension scheme is welfare increasing. If we use as weights the stochastic discount factors that corresponds to these states of nature, we conclude the opposite: a DB pension scheme reduces welfare. The probability that future households actually experience a welfare gain if the pension scheme is closed can be as large as 38 percent. So, a pure DB pension scheme has a large commitment problem: continuity will become at risk in case participation in the pension scheme is not mandatory. These results are most sensitive for the values of the labour supply elasticity, the risk aversion parameter and the mean and the standard deviation of the excess return on equity.