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Incentive and Insurance Effects of Tax Financed Unemployment Insurance

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  • Andersen, Torben M
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    Abstract

    The potential distortions of job-search incentives caused by unemployment benefits and their financing are well known. However, a benefit-tax scheme also provides insurance having direct utility effects as well as indirect effects on risk taking. The latter mitigates or may even dominate standard incentive effects to produce a non-monotone relation between efficiency (incentives) and equity (insurance). This implies that an increase in both benefits and the tax rate up to some point may increase average income and reduce inequality, i.e., there is not necessarily a trade-off between considerations for efficiency and equity. However, optimal utilitarian policies always position the economy at a point where marginal policy changes involve a trade-off, otherwise policies would not be optimal.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8025.

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    Date of creation: Sep 2010
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    Handle: RePEc:cpr:ceprdp:8025

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    Keywords: incentives; risk sharing; Search; unemployment benefits;

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