Social Insurance in General Equilibrium

This paper extends the dynamic Mirrlees model to general equilibrium and derives the optimal social insurance policies against persistent idiosyncratic risk over the life cycle. Agents are heterogeneous in their work ability, which is private information and evolves stochastically over time, and produce intermediate goods that are imperfect substitutes in the production of the final good for consumption. I provide a parsimonious characterization of the new general equilibrium forces influencing the optimal labor distortions using sufficient statistics related to endogenous wages