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 w here agents are subject to uninsurable, individual specific productivity ri sk. In particular, we consider the trade-off between positive insurance eff ects and negative distortions on labor supply and saving. We parameterize t he model by estimating productivity processes on Swedish and U.S. data. The estimation results show that agents in the United States are Subject to mo re idiosyncratic risk than agents in Sweden. Although distortions are signi ficant, the welfare benefits of government redistribution and insurance sys tems can be substantial. (C) 2001 Academic Press.