Kyoung Jin ChoiJunkee JeonHo-Seok LeeHsuan-Chih Lin2024-10-152024-10-152022-0501676687https://www.scopus.com/record/display.uri?eid=2-s2.0-85125641489&origin=resultslisthttps://scholars.lib.ntu.edu.tw/handle/123456789/722049We study an optimal long-term labor contract that provides disability insurance benefits under two frictions: the agent cannot commit to a long-term contract and the disability shock is private information. We predict that a job with a high risk of disability should provide a higher level of salary but with a lower growth rate over time. We find that the optimal contract can be implemented under a three-account trading system in which mandatory savings can be imposed to discourage a worker from falsely claiming disability. We also investigate how the nature of disability shock has an impact on the optimal contract: a larger borrowing limit should be given to a worker with a high severity of the disability shock or a low arrival intensity. Finally, our quantitative analysis shows that the cost caused by current long-term disability insurance practice can be substantial.enfalseDisability insuranceDynamic contractingIncentivesLimited commitmentTruth-telling[SDGs]SDG8journal article10.1016/j.insmatheco.2022.02.0072-s2.0-85125641489