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Optimal Taxation and Social Insurance with Endogenous Private Insurance

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  • Raj Chetty
  • Emmanuel Saez

Abstract

We characterize welfare gains from government intervention when the private sector provides partial insurance. We analyze models in which adverse selection, pre-existing information, or imperfect optimization create a role for government intervention. We derive formulas that map existing empirical estimates into quantitative predictions for optimal policy. When private insurance generates moral hazard, standard formulas for optimal government insurance must be modified to account for fiscal externalities. In contrast, standard formulas are unaffected by "informal" private insurance that does not generate moral hazard. Applications to health and unemployment show that formal private market insurance can significantly reduce optimal government benefit rates. (JEL D82, G22, H21, H23, J65)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 2 (May)
Pages: 85-114

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Handle: RePEc:aea:aejpol:v:2:y:2010:i:2:p:85-114

Note: DOI: 10.1257/pol.2.2.85
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Citations

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Cited by:
  1. Hsu, Minchung & Yang, C.C., 2013. "Optimal linear and two-bracket income taxes with idiosyncratic earnings risk," Journal of Public Economics, Elsevier, vol. 105(C), pages 58-71.
  2. Taskin, Temel, 2012. "Does unemployment insurance crowd out home production?," MPRA Paper 37583, University Library of Munich, Germany.
  3. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
  4. Casey B. Mulligan, 2009. "Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?," NBER Working Papers 15281, National Bureau of Economic Research, Inc.
  5. Ortigueira, Salvador & Siassi, Nawid, 2013. "How important is intra-household risk sharing for savings and labor supply?," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 650-666.
  6. Jean-Baptiste Michau, 2012. "Optimal labor market policy with search frictions and risk-averse workers," Working Papers hal-00757173, HAL.
  7. Mark Cullen & Liran Einav & Amy Finkelstein, 2009. "Estimating Welfare in Insurance Markets Using Variation in Prices," Discussion Papers 08-046, Stanford Institute for Economic Policy Research.
  8. Craig, Steven G. & Hemissi, Wided & Mukherjee, Satadru & Sørensen, Bent E, 2013. "How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance," CEPR Discussion Papers 9520, C.E.P.R. Discussion Papers.
  9. Bertola, Giuseppe & Koeniger, Winfried, 2013. "Hidden insurance in a moral hazard economy," CFS Working Paper Series 2013/25, Center for Financial Studies (CFS).
  10. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
  11. Nick Netzer & Florian Scheuer, 2010. "Competitive screening in insurance markets with endogenous wealth heterogeneity," Economic Theory, Springer, vol. 44(2), pages 187-211, August.
  12. Giuseppe Bertola & Anna Lo Prete, 2013. "Finance, governments, and trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 149(2), pages 273-294, June.
  13. Craig, Steven G. & Hoang, Edward C., 2011. "State government response to income fluctuations: Consumption, insurance, and capital expenditures," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 343-351, July.
  14. Goulão, Catarina, 2014. "Voluntary Public Health Insurance," TSE Working Papers 14-488, Toulouse School of Economics (TSE).

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