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Redistribution as Social Insurance and Capital Market Integration

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  • Giampaolo Arachi
  • Massimo D'Antoni

Abstract

In this paper we claim that enhanced economic integration can call for an increase in redistribution among workers. When individuals are risk averse and no human capital insurance is available, the share of workers who choose to invest in "specific" human capital will be inefficiently low. Redistribution among workers plays the role of the missing insurance market by making the investment in the specific skills more attractive. Capital market integration has two different effects. On the one hand it makes labour income taxation more distortionary, therefore reducing the optimal tax rate on labour. On the other hand, it increases the variance of specific labour wage and widens the scope for risk protection of specific human capital through the redistribution implemented by a labour income tax. We show that the insurance effect of redistribution can be stronger than the distortionary effect, so that the optimal tax rate on labour income can increase when capital markets become more integrated.

Suggested Citation

  • Giampaolo Arachi & Massimo D'Antoni, 2004. "Redistribution as Social Insurance and Capital Market Integration," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(4), pages 531-547, August.
    • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:4:p:531-547
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    References listed on IDEAS

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    Cited by:

    1. Ugo Pagano, 2003. "Cultural Diversity, European Integration and the Welfare State," Department of Economics University of Siena 414, Department of Economics, University of Siena.
    2. Michele Di Maio, 2006. "Uncertainty, Gains from Specialization and the Welfare State," Working Papers 36-2006, Macerata University, Department of Finance and Economic Sciences, revised Oct 2008.

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