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The Efficiency-Equality Tradeoff in Welfare State Economies

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  • Radim Bohacek

Abstract

This paper studies the effects of different levels of social insurance on efficiency and distribution of resources in a general equilibrium model of a closed economy with heterogeneous agents and moral hazard. I compare optimal allocations of capital, labor supply, and consumption in stationary recursive equilibria for economies with different guaranteed minimum consumption levels (social insurance). I show that the efficiency-equality tradeoff associated with welfare state economies does not hold. Efficiency decreases and equality rises as the minimal guaranteed consumption increases from zero to around one third of the average consumption. However, if social insurance expands even further, the efficiency loss becomes very high and equality worsens. Average welfare is greater in economies with high social insurance while the median agent is better off in economies with low social insurance. Finally, I study the transitions between welfare regimes' steady states to evaluate the effects of social insurance reforms.

Suggested Citation

  • Radim Bohacek, 2001. "The Efficiency-Equality Tradeoff in Welfare State Economies," CERGE-EI Working Papers wp187, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp187
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    Cited by:

    1. Radim Bohacek, 2000. "Capital Accumulation in an Economy with Heterogeneous Agents and Moral Hazard," CERGE-EI Working Papers wp165, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    2. Radim Bohacek, 2001. "Capital Accumulation And Moral Hazard In An Economy With Heterogeneous Agents," CeNDEF Workshop Papers, January 2001 1B.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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