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Policy-Oriented Parties and the Choice between Social and Private Insurance

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  • De Donder, Philippe
  • Hindriks, 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 Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 226.

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Date of creation: 2003
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Publication status: Published in Journal of Risk and Uncertainty, vol.�38, n°1, février 2009, p.�73-86.
Handle: RePEc:ide:wpaper:3348

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  1. Joel Shapiro, 2001. "Income maintenance programs and multidimensional screening," Economics Working Papers 544, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Jean Hindriks & Philippe De Donder, 2001. "The Politics of Redistributive Social Insurance," Working Papers 444, Queen Mary, University of London, School of Economics and Finance.
  3. Gouveia, Miguel, 1997. " Majority Rule and the Public Provision of a Private Good," Public Choice, Springer, vol. 93(3-4), pages 221-44, December.
  4. Petretto, Alessandro, 1999. "Optimal social health insurance with supplementary private insurance," Journal of Health Economics, Elsevier, vol. 18(6), pages 727-745, December.
  5. Cremer, H. & Pestieau, P., . "Redistributive taxation and social insurance," CORE Discussion Papers RP -1235, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Blomqvist, Ake & Horn, Henrik, 1984. "Public health insurance and optimal income taxation," Journal of Public Economics, Elsevier, vol. 24(3), pages 353-371, August.
  7. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
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