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Policy-oriented Parties and the Choice Between Social and Private Insurance

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  • De Donder, Philippe
  • Hindricks, Jean

Abstract

We study the political economy of social insurance in a world where individuals differ in both income and risk. Social insurance is financed through distortionary taxation and redistributes across income and risk. Individuals vote on social insurance that they can complement with insurance bought on the private market. Private insurance is actuarially fair but suffers from adverse selection, which results in a screening equilibrium with partial coverage. The equilibrium social insurance is the result of an electoral competition game where parties maximize the utility of their members. We calculate the equilibrium social insurance offered by the two parties as well as their equilibrium membership, and study how the equilibrium outcome is affected by electoral uncertainty, distortions from taxation, risk aversion and the distribution of risk and income. We then calibrate the model to US data from the PSID survey. Lastly, we study how the political demand for social insurance is affected by the possibility to redistribute through income taxation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4864.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4864

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Keywords: adverse selection; political economy; redistribution; social insurance;

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  1. De Donder, Philippe & Hindriks, Jean, 2003. "The Politics of Redistributive Social Insurance," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  2. Petretto, Alessandro, 1999. "Optimal social health insurance with supplementary private insurance," Journal of Health Economics, Elsevier, vol. 18(6), pages 727-745, December.
  3. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
  4. CREMER, Helmuth & PESTIEAU, Pierre, 1995. "Redistributive Taxation and Social Insurance," CORE Discussion Papers 1995054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Blomqvist, Ake & Horn, Henrik, 1984. "Public health insurance and optimal income taxation," Journal of Public Economics, Elsevier, vol. 24(3), pages 353-371, August.
  6. Joel Shapiro, 2001. "Income maintenance programs and multidimensional screening," Economics Working Papers 544, Department of Economics and Business, Universitat Pompeu Fabra.
  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.
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