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Equilibrium social insurance with policy-motivated parties

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  • DE DONDER, Philippe
  • HINDRIKS, Jean

Abstract

We study the political economy of social insurance with double heterogeneity of voters (e.e., different income and risk levels). Social insurance is financed through distortionary taxation and redistributes across income and risks. Individuals vote over the extent of social insurance, which they can complement on the private market. Private insurance suffers from adverse selection which results into insurance rationing. We model political competition a la Wittman, with two parties maximizing the utility of their members. Party membership is endogenously determined. We show that although individuals differ in two dimensions, their preference for social insurance can be aggregated into a single dimensional type function. We then resort to numerical simulations to solve the political equilibrium outcome as a function of the distribution of income and risk. We obtain equilibrium policy differentiation with the Left party proposing more social insurance than the Right party. The Left party's equilibrium membership is made of low risk and high income individuals, with high risk and low income individuals forming the Right party's constituency. In equilibrium, each party is tying for winning. Unlike the median voter outcome, our equilibrium outcome depends on the whole income and risks distribution, and increasing income polarization leads both parties to propose less social insurance. We also compare the political equilibrium outcome with the Rawlsian and utilitarian outcomes.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006033.

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Date of creation: 00 Mar 2006
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Handle: RePEc:cor:louvco:2006033

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Keywords: electoral competition; endogenous parties; Wittman equilibrium; social insurance; adverse selectio;

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  1. John Roemer, 2005. "Distribution and politics: a brief history and prospect," Social Choice and Welfare, Springer, vol. 25(2), pages 507-525, December.
  2. Hindriks, Jean & De Donder, Philippe, 2003. "The politics of redistributive social insurance," Journal of Public Economics, Elsevier, vol. 87(12), pages 2639-2660, December.
  3. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
  4. Jean-Charles Rochet, 1991. "Incentives, Redistribution and Social Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(2), pages 143-165, December.
  5. Nalebuff, B. & Caplin, A., 1992. "Competition Among Institutions," Discussion Papers 1992_36, Columbia University, Department of Economics.
  6. Petretto, Alessandro, 1999. "Optimal social health insurance with supplementary private insurance," Journal of Health Economics, Elsevier, vol. 18(6), pages 727-745, December.
  7. Gouveia, Miguel, 1997. " Majority Rule and the Public Provision of a Private Good," Public Choice, Springer, vol. 93(3-4), pages 221-44, December.
  8. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
  9. Joel Shapiro, 2001. "Income maintenance programs and multidimensional screening," Economics Working Papers 544, Department of Economics and Business, Universitat Pompeu Fabra.
  10. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  11. Woojin Lee & John E. Roemer, 2005. "The Rise and Fall of Unionised Labour Markets: A Political Economy Approach," Economic Journal, Royal Economic Society, vol. 115(500), pages 28-67, 01.
  12. Ignacio Ortuño Ortín & John E. Roemer, 2000. "Endogenous Party Formation And The Effect Of Income Distribution On Policy," Working Papers. Serie AD 2000-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  13. Helmuth Cremer & Pierre Pestieau, 1996. "Redistributive taxation and social insurance," International Tax and Public Finance, Springer, vol. 3(3), pages 281-295, July.
  14. John E. Roemer, 2004. "Modeling Party Competition in General Elections," Cowles Foundation Discussion Papers 1488, Cowles Foundation for Research in Economics, Yale University.
  15. Blomqvist, Ake & Horn, Henrik, 1984. "Public health insurance and optimal income taxation," Journal of Public Economics, Elsevier, vol. 24(3), pages 353-371, August.
  16. Weingast, Barry R. & Wittman, Donald, 2008. "The Oxford Handbook of Political Economy," OUP Catalogue, Oxford University Press, number 9780199548477.
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Cited by:
  1. OLIVELLA, Pau & SCHROYEN, Fred, 2011. "Multidimensional screening in a monopolistic insurance market," CORE Discussion Papers 2011056, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Niklas Potrafke, 2012. "Political cycles and economic performance in OECD countries: empirical evidence from 1951–2006," Public Choice, Springer, vol. 150(1), pages 155-179, January.
  3. Daniel L. McFadden & Carlos E. Noton & Pau Olivella, 2012. "Remedies for Sick Insurance," NBER Working Papers 17938, National Bureau of Economic Research, Inc.
  4. Llavador, Humberto & Solano-García, Angel, 2011. "Immigration policy with partisan parties," Journal of Public Economics, Elsevier, vol. 95(1), pages 134-142.
  5. Christian Bjørnskov & Niklas Potrafke, 2009. "Political ideology and economic freedom across Canadian provinces," Working Papers CEB 09-054.RS, ULB -- Universite Libre de Bruxelles.
  6. Angel Solano-Garcia, 2013. "Tax Compliance and Income Redistribution. A Political Competition Model," ThE Papers 13/06, Department of Economic Theory and Economic History of the University of Granada..
  7. Niklas Potrafke, 2011. "Does government ideology influence budget composition? Empirical evidence from OECD countries," Economics of Governance, Springer, vol. 12(2), pages 101-134, June.
  8. Potrafke, Niklas, 2010. "The growth of public health expenditures in OECD countries: do government ideology and electoral motives matter?," MPRA Paper 24083, University Library of Munich, Germany.
  9. Niklas Potrafke, 2012. "Is German domestic social policy politically controversial?," Public Choice, Springer, vol. 153(3), pages 393-418, December.
  10. Niklas Potrafke, 2010. "Ideology and cultural policy," TWI Research Paper Series 49, Thurgauer Wirtschaftsinstitut, Universität Konstanz.

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