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Increases in Risk and the Welfare State

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Author Info
Thomas Eichner ()
Andreas Wagener ()

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Abstract

According to many observers, the world is currently getting riskier along many of its dimensions. In this paper we analyse how the welfare state, i.e., social insurance that works through redistributive taxation, should deal with this trend. We distinguish between risks that can be insured by the welfare state and such than cannot (background risks). Insurable risks can be reduced either by individual self-insurance or, through pooling, by social insurance. Both ways are costly in terms of income foregone. We show: (i) Self-insurance will be higher the more costly is the welfare state and the larger are background or insured risks. (ii) Full risk coverage by the welfare state can only be optimal in a costless welfare state. (iii) The optimal size of the welfare state is larger the higher are the risks that it cannot insure. The impact of the size of risks that can be insured is, however, unclear.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 685.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_685

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Related research
Keywords: welfare state; background risks; social insurance;

Find related papers by JEL classification:
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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  1. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September. [Downloadable!] (restricted)
  2. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March. [Downloadable!] (restricted)
    Other versions:
  3. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
  4. Luigi Guiso & Tullio Jappelli, 1998. "Background Uuncertainty and the Demand for Insurance against Insurable Risks," CSEF Working Papers 02, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  5. Dionne, Georges & Eeckhoudt, Louis, 1985. "Self-insurance, self-protection and increased risk aversion," Economics Letters, Elsevier, vol. 17(1-2), pages 39-42. [Downloadable!] (restricted)
    Other versions:
  6. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March. [Downloadable!] (restricted)
  7. Sinn, Hans-Werner, 1995. " A Theory of the Welfare State," Scandinavian Journal of Economics, Blackwell Publishing, vol. 97(4), pages 495-526, December.
    Other versions:
  8. Menezes, C F & Hanson, D L, 1970. "On the Theory of Risk Aversion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 481-87, October. [Downloadable!] (restricted)
  9. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September. [Downloadable!] (restricted)
  10. Bird, Edward J., 2001. "Does the welfare state induce risk-taking?," Journal of Public Economics, Elsevier, vol. 80(3), pages 357-383, June. [Downloadable!] (restricted)
  11. Cheng, Hsueh-Cheng & Magill, Michael J P & Shafer, Wayne J, 1987. "Some Results on Comparative Statics under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 493-507, June. [Downloadable!] (restricted)
  12. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June. [Downloadable!] (restricted)
  13. Briys, Eric & Eeckhoudt, Louis, 1985. "Relative Risk Aversion in Comparative Statics: Comment," American Economic Review, American Economic Association, vol. 75(1), pages 281-83, March. [Downloadable!] (restricted)
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