Social insurance and labor mobility : a political economy approach

This paper presents a political economy approach to payroll tax competition between countries adopting different systems of social insurance. It considers two such systems: the Bismarckian one where benefits are partially linked to payroll taxes and the Beveridgean one where benefits are fiat. A third system, referred to as private, with no redistributive feature (and relying on the concept of actuarial fairness) is also considered. Our main objective is to assess the relative robustness of Bismarckian and Beveridgean social insurance systems in various symmetric and asymmetric set- tings. Quite surprisingly, the common belief that the Bismarckian system is more tax-competition proof turns out to be wrong in a number of cases. The fundamental instability of a Beveridgean system nevertheless appears when the social insurance system itself (and not just the level of protection) is chosen in a strategic way at some prior (constitutional) stage. It may then be a dominant strategy for all countries to adopt a Bismarckian system even when the Beveridgean system is less affected by tax competition. In other wordsl the choice of social insurance systems resemble a prisoners dilemma type game.