A Theory of the Welfare State
AbstractThe welfare state can be seen as an insurance device that makes lifetime careers safer, increases risk taking and suffers from moral hazard effects. Adopting this view, the paper studies the trade-off between average income and inequality, evaluating redistributive equilibria from an allocative point of view. It identifies the properties of an optimal welfare state and shows that constant returns to risk taking are likely to imply a redistribution paradox where more redistribution results in more inequality. In general, optimal taxation will either imply that the redistribution paradox is present or that the economy operates at a point of its efficiency frontier where more inequality implies a lower average income.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4856.
Date of creation: Apr 1996
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Other versions of this item:
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- D6 - Microeconomics - - Welfare Economics
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- Levy, Haim, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Comment," American Economic Review, American Economic Association, vol. 79(3), pages 597-600, June.
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Cowles Foundation Discussion Papers
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- Sinn, Hans-Werner, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Comment," American Economic Review, American Economic Association, vol. 79(3), pages 601-02, June.
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- Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-28, November.
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