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Social Insurance and Redistribution with Moral Hazard and Adverse Selection

  • Robin Boadway
  • Manuel Leite-Monteiro
  • Maurice Marchand
  • Pierre Pestieau

Rochet (1991) showed that with distortionary income taxes, social insurance is a desirable redistributive device when risk and ability are negatively correlated. This finding is re-examined when "ex post" moral hazard and adverse selection are included, and under different informational assumptions. Individuals can take actions influencing the size of the loss in the event of accident (or ill health). Social insurance can be supplemented by private insurance, but private insurance markets are affected by both adverse selection and moral hazard. We study how equity and efficiency considerations should be traded off in choosing the optimal coverage of social insurance when those features are introduced. The case for social insurance is strongest when the government is well informed about household productivity. Copyright The editors of the "Scandinavian Journal of Economics" 2006 .

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Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 108 (2006)
Issue (Month): 2 (07)
Pages: 279-298

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Handle: RePEc:bla:scandj:v:108:y:2006:i:2:p:279-298
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  1. Cremer, H. & Pestieau, P., . "Redistributive taxation and social insurance," CORE Discussion Papers RP -1235, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  8. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
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