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A Theory of the Welfare State

  • Sinn, Hans-Werner

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 examines the problem of optimal redistributive taxation with tax-induced risk taking and shows that constant returns to risk taking are likely to imply a paradox where more redistribution results in more post-tax inequality. In general, optimal taxation will imply either 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. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

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

Volume (Year): 97 (1995)
Issue (Month): 4 (December)
Pages: 495-526

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Handle: RePEc:bla:scandj:v:97:y:1995:i:4:p:495-526
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  1. Joseph E. Stiglitz, 1968. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk Taking," Cowles Foundation Discussion Papers 248, Cowles Foundation for Research in Economics, Yale University.
  2. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September.
  3. Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-28, November.
  4. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  5. 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.
  6. Diamond, P. A. & Helms, L. J. & Mirrlees, J. A., 1980. "Optimal taxation in a stochastic economy : A Cobb-Douglas example," Journal of Public Economics, Elsevier, vol. 14(1), pages 1-29, August.
  7. 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.
  8. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  9. 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.
  10. Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277.
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