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Governmental Transfers Can Reduce a Moral Hazard Problem

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  • Amihai Glazer

    ()
    (Department of Economics, University of California-Irvine)

  • Hiroki Kondo

    (Department of Economics, Sophia University)

Abstract

An altruistic agent who may aid a person with a low income may cause that person to exert little effort to increase his income. Such behavior generates a Dilemma, in which welfare is lower than when no one is altruistic. We show how governmental transfers, which do not allow for reallocation from a person who saves much to one who saves little, reduces the effect, and can lead to an outcome which is Pareto-superior to the outcome under a Nash equilibrium with no government taxation and transfers.

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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 101102.

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Length: 25 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:irv:wpaper:101102

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Keywords: Social security; Moral hazard; Savings; Altruism;

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  1. Johan Lagerl–f, 2004. "Efficiency-enhancing signalling in the Samaritan's dilemma," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 114(492), pages 55-69, 01.
  2. Bruce, Neil & Waldman, Michael, 1990. "The Rotten-Kid Theorem Meets the Samaritan's Dilemma," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 155-65, February.
  3. Homburg, Stefan, 2000. "Compulsory savings in the welfare state," Journal of Public Economics, Elsevier, Elsevier, vol. 77(2), pages 233-239, August.
  4. Warr, Peter G., 1982. "Pareto optimal redistribution and private charity," Journal of Public Economics, Elsevier, Elsevier, vol. 19(1), pages 131-138, October.
  5. Kathleen McGarry & Robert F. Schoeni, 1994. "Transfer Behavior: Measurement and the Redistribution of Resources within the Family," NBER Working Papers 4607, National Bureau of Economic Research, Inc.
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