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The Efficiency-Equality Tradeoff in Welfare State Economies

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Author Info
Radim Bohacek

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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.

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Publisher Info
Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp187.

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Date of creation: Dec 2001
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Handle: RePEc:cer:papers:wp187

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Find related papers by 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 and Programming - - - Computable General Equilibrium Models
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
I38 - Health, Education, and Welfare - - Welfare and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

Cited by:
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  1. 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.
  2. Radim Bohacek, 2001. "Capital Accumulation in an Economy with Heterogeneous Agents and Moral Hazard," GE, Growth, Math methods 0012001, EconWPA. [Downloadable!]
  3. 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 - Economic Institute, Prague. [Downloadable!]
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