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The welfare effect of income tax deductions for losses as insurance: Insured- versus insurer-sided adverse selection

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  • Wu, T.C. Michael
  • Yang, C.C.
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    Abstract

    Kaplow (1992) shows in a complete-information environment that allowing income tax deductions for losses as partial insurance is undesirable in the presence of private insurance markets. This paper elaborates on Kaplow's finding by studying two extreme types of asymmetric information structures in private insurance markets: Either the insured or insurers possess superior information. It is shown that our derived result is consistent with Kaplow's if the insured have superior information; however, Kaplow's negative conclusion with respect to the income tax deduction will be overturned if insurers have superior information instead. A policy implication from our finding is that whether or not to allow an income tax deduction for losses needs to be more refined and, specifically, it should be tailored to the “adverse selection” information structures of private insurance.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 6 ()
    Pages: 2641-2645

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    Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2641-2645

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Income tax deductions for losses; Informed insurer; Adverse selection;

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    References

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    1. Kaplow, Louis, 1992. "Income Tax Deductions for Losses as Insurance," American Economic Review, American Economic Association, vol. 82(4), pages 1013-17, September.
    2. Cremer, Helmuth & Pestieau, Pierre, 2004. "Intergenerational Transfer of Human Capital and Optimal Education Policy," CEPR Discussion Papers 4201, C.E.P.R. Discussion Papers.
    3. Kuniyoshi Saito, 2006. "Testing for Asymmetric Information in the Automobile Insurance Market Under Rate Regulation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(2), pages 335-356.
    4. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
    5. Kessing, Sebastian G. & Konrad, Kai A., 2006. "Union strategy and optimal direct taxation," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 393-402, January.
    6. Villeneuve, Bertrand, 2000. "The consequences for a monopolistic insurance firm of evaluating risk better than customers : The adverse selection hypothesis reversed," Economics Papers from University Paris Dauphine 123456789/5367, Paris Dauphine University.
    7. Louis Kaplow, 1989. "Incentives and Government Relief for Risk," NBER Working Papers 3007, National Bureau of Economic Research, Inc.
    8. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
    9. S. Hun Seog, 2009. "Insurance Markets With Differential Information," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 279-294.
    10. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
    11. Boyer, M Martin, 2000. " Insurance Taxation and Insurance Fraud," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(1), pages 101-34.
    12. Villeneuve, Bertrand, 2005. "Competition between insurers with superior information," Economics Papers from University Paris Dauphine 123456789/5356, Paris Dauphine University.
    13. Georges Dionne & Christian Gourieroux & Charles Vanasse, 2001. "Testing for Evidence of Adverse Selection in the Automobile Insurance Market: A Comment," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 444-473, April.
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