A note on life insurance, human capital accumulation and economic growth

ABSTRACT

The purpose of this paper is to identify the conditions necessary for the effective functioning of disability insurance in the framework of an overlapping-generations model. Unlike preceding studies, we focus on demographic trends and differences in productivity between young and old workers. Our model implies that the effects of a young or old population on economic growth vary depending on whether peer effects on the process of human capital formation are positive or negative. If a positive peer effect is dominant and either the young or old population is small, economic growth might be higher when disability insurance is available than when it is not. Our results provide important suggestions for governments of the least developed countries in which insurance markets are either non-existent or underdeveloped.

KEYWORDS:

• Disability insurance
• human capital productivity
• economic growth
• depopulation
• peer effects

Acknowledgments

The author gratefully acknowledges an anonymous reviewer for valuable comments and suggestions. I also thank Prof. Noriyoshi Yanase and Prof. Yoshihiro Ito for helpful comments and discussions regarding an earlier version of this paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Although Lu and Yanagihara (2013) did not use the term disability insurance, the life insurance used in their model essentially refers to disability insurance.

² Noda’s (2019) model assumed that the productivity level in the old-age period is linearly related to that in the young-age period. Unlike the model presented by Noda (2019), the model used in this study treats productivity in the young-age period and that in the old-age period as different parameters. This assumption allows us to examine comparative statics regarding the effects of productivity in the young-age and old-age periods on economic growth.

³ Lu (2011) noted that although numerous empirical studies have statistically verified the presence of peer effects, very few theoretical studies have clearly explained the mechanisms underlying peer effects.

⁴ Because the model assumes that the young population and old population in each period are constant at $L$, the total population in each period is $2L$. Observing the effect of the young and old population on the equilibrium GDP growth rate is therefore synonymous with observing the effect of the total population on the equilibrium GDP growth rate.

Additional information

Funding

This work was supported by the research grant 2019 from the KAMPO Foundation.