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Idiosyncratic Risk in the U.S. and Sweden: Is there a Role for Government Insurance?

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  • Flodén, Martin

    ()
    (Institute for International Economic Studies, Stockholm University)

  • Linde, Jesper

    ()
    (Handelshögskolan)

Abstract

We examine the effects of government redistribution schemes in an economy where agents are subject to uninsurable, individual specific productivity risk. In particular, we consider the trade-off between positive insurance effects and negative distortions on labor supply. We parameterize the model by estimating productivity processe on Swedish and U.S. data. The estimation results show that agents in the U.S. are subject to more idiosynchratic risk than agents in sweden. Distortions are significant but agents, particularly in the U.S., still like some government insurance. As a result of this exercice, we can construct Laffer curves for both countries. These peak when labor income tax rates are around 60 percent.

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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 654.

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Length: 36 pages
Date of creation: 01 Sep 1998
Date of revision:
Handle: RePEc:hhs:iiessp:0654

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/
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Keywords: Idiosyncratic Risk; Inequality; Insurance; Redistribution; Laffer Curve; Distributions;

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