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A Theory of the Welfare State

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Author Info
Hans-Werner Sinn

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Abstract

The 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4856.

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Date of creation: Apr 1996
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Handle: RePEc:nbr:nberwo:4856

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Find related papers by JEL classification:
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
D6 - Microeconomics - - Welfare Economics

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. John C. Harsanyi, 1953. "Cardinal Utility in Welfare Economics and in the Theory of Risk-taking," Journal of Political Economy, University of Chicago Press, vol. 61, pages 434. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August. [Downloadable!] (restricted)
  4. Joseph E. Stiglitz, 1968. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk Taking," Cowles Foundation Discussion Papers 248, Cowles Foundation, Yale University. [Downloadable!]
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  5. Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-28, November. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September. [Downloadable!] (restricted)
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  8. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September. [Downloadable!] (restricted)
  9. Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277. [Downloadable!] (restricted)
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