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Credible social insurance

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  • Christopher Sleet
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    Abstract

    Social insurance arrangements that are optimal from the perspective of a utilitarian planner confronting a population of privately informed agents frequently exhibit an "immiseration" property - with probability 1 an agent's continuation utility will drift downwards to its minimal level. Thus, the ex ante optimal provision of incentives implies severe ex post inequality and are time inconsistent. This paper introduces an additional friction: it assumes that the utilitarian planner can not commit. To analyse the problem without planner commitment, concepts from the dynamic contracting and sustainable plans literature are blended and the planner's problem is embedded into a policy game. Allocations can be supported as equilibria of this game if they satisfy a bound on the continuation payoffs of the planner. The optimal sustainable allocation does not exhibit immiseration. Credibility or sustainability constraints on the utilitarian planner translate into greater ex post equality than would otherwise occur.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 75.

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    Date of creation: 2004
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    Handle: RePEc:red:sed004:75

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    Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    Related research

    Keywords: Macroeconomic policy; dynamic contracting;

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    Cited by:
    1. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2006. "Markets Versus Governments: Political Economy of Mechanisms," Levine's Bibliography 321307000000000032, UCLA Department of Economics.
    2. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2007. "Political Economy of Mechanisms," Working Papers CAS_RN_2007_2, Laboratory for Macroeconomic Analysis.
    3. Emmanuel Farhi & Ivan Werning, 2005. "Inequality, Social Discounting and Estate Taxation," NBER Working Papers 11408, National Bureau of Economic Research, Inc.
    4. Narayana R Kocherlakota, 2005. "Advances in Dynamic Optimal Taxation," Levine's Bibliography 784828000000000518, UCLA Department of Economics.

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