DP19989 Risk Protection and Redistribution in the Design of Social Insurance
We develop and empirically implement a framework to evaluate the societal value of social insurance, explicitly accounting for arbitrary individual-level heterogeneity. Our approach extends the classic Baily Chetty formula to incorporate how differences in individuals' willingness-to-pay for insurance, program cross-subsidisation, and inequality-averse social preferences influence the social value of reforms. Applying this framework to U.S. Unemployment Insurance (UI), we provide novel evidence on the distribution of willingness-to-pay for UI and the societal value of the current system. Our results show that accounting for worker heterogeneity significantly increases the estimated value of a lump-sum UI expansion, enough to overturn standard policy recommendations found in the existing literature.
