This paper studies optimal linear income taxation and redistributive social insurance when the former has the traditional labor distortion and the latter generates both ex ante and ex post moral hazard. Private insurance is available and individuals differ in labor productivity and in loss probability. We show that government intervention in insurance markets is welfare-improving, and social insurance is generally desirable particularly when there is a negative correlation between laborproductivity and loss probability.
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number
2001041.
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Paper
Robin Boadway & Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2002.
"Social Insurance and Redistribution,"
Working Papers
1004, Queen's University, Department of Economics.
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Marshall, John M, 1976.
"Moral Hazard,"
American Economic Review,
American Economic Association, vol. 66(5), pages 880-90, December.
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Dreze, Jean & Stern, Nicholas, 1987.
"The theory of cost-benefit analysis,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 14, pages 909-989
Elsevier.
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