Idiosyncratic risk in the United States and Sweden:: Is there a role for government insurance?

We examine the effects of government redistribution schemes in an economy where agents are subject to uninsurable, individual specific productivity risk. In particular, we consider the trade-off between positive insurance effects and negative distortions on labor supply and saving. We parameterize the model by estimating productivity processes on Swedish and U.S. data. The estimation results show that agents in the United States are Subject to more idiosyncratic risk than agents in Sweden. Although distortions are significant, the welfare benefits of government redistribution and insurance systems can be substantial. (C) 2001 Academic Press.