The efficiency theory of productivity leads naturally to the principle that highly productive people should work harder than less productive people. However, systematic differences in actual hours worked by high- and low-income earners are not evident. We highlight that home insurance is an important consequence of this fact. Using a variable agent variable model with insurance frictions, income effects limited to match aggregate hours across time and space, and financial frictions that produce realistic wealth dispersion, we report strong insurance effects: full insurance can increase labor productivity by 9.6 percent and reduce hours worked by 10 percent. are 7.7.
That’s according to a new NBER working paper on
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