The welfare effect of income tax deductions for losses as insurance: Insured- versus insurer-sided adverse selection
AbstractKaplow (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 InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 29 (2012)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/inca/30411
Income tax deductions for losses; Informed insurer; Adverse selection;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
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