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Multiple Equilibria in the Welfare State

Author

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  • Alvaro Forteza

    (Departmento de Economía, Facultad de Ciencias Sociales, Universidad de la República)

Abstract

Excess distortions in the welfare state might be the consequence of the government's lack of ability to commit not to help "unlucky" agents. Incentive considerations that are crucial in standard insurance in the presence of moral hazard, plays no role in this case. As a consequence, the government might provide too much insurance. Still, equilibria with incomplete insurance and above-minimum effort might arise. Two possible reasons for multiple equilibria are explored in the paper, namely that marginal utility of consumption is positively associated with effort and that economic policy is costly. It is shown that the equilibria can be Pareto rankable. Borrowing analytical tools from recent developments in dynamic games (Matsui and Matsuyama, 1995), stability conditions of different equilibria are analyzed.

Suggested Citation

  • Alvaro Forteza, 1995. "Multiple Equilibria in the Welfare State," Documentos de Trabajo (working papers) 0395, Department of Economics - dECON.
    • Handle: RePEc:ude:wpaper:0395
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    File URL: https://hdl.handle.net/20.500.12008/2282
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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