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Optimal Taxation and Social Insurance with Endogenous Private Insurance

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  • Raj Chetty
  • Emmanuel Saez

Abstract

This paper characterizes the welfare gains from redistributive taxation and social insurance in an environment where the private sector provides partial insurance. We analyze stylized models in which adverse selection, pre-existing information, or imperfect optimization in private insurance markets create a role for government intervention. We derive simple formulas that map reduced-form empirical estimates into quantitative predictions for optimal tax and social insurance policy. Applications to unemployment and health insurance show that taking private market insurance into account matters significantly for optimal benefit levels given existing empirical estimates of the key parameters.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14403.

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Date of creation: Oct 2008
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Publication status: published as Raj Chetty & Emmanuel Saez, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," American Economic Journal: Economic Policy, American Economic Association, vol. 2(2), pages 85-114, May.
Handle: RePEc:nbr:nberwo:14403

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