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The Spirit of the Welfare State? Adaptation in the Demand for Social Insurance

Martin Ljunge
Journal of Human Capital
Vol. 6, No. 3 (Fall 2012), pp. 187-223
DOI: 10.1086/667723
Stable URL: http://www.jstor.org/stable/10.1086/667723
Page Count: 37
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The Spirit of the Welfare State? Adaptation in the Demand for Social
                        Insurance
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Abstract

Young generations demand substantially more social insurance than older generations, although program rules have been constant for decades. I postulate a model in which the utility of claiming social insurance benefits depends on older generations’ past behavior. The intertemporal mechanism estimated can account for half of the younger generations’ higher demand for social insurance benefits. Instrumenting for older generations’ behavior using mortality rates reveals an even stronger influence of reference group behavior on individual demand. The analysis suggests that behavioral responses estimated by natural experiments could strongly underestimate the true long-run elasticities relevant for the fiscal sustainability of the welfare state.

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