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A Theory of the Welfare State

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  • Sinn, Hans-Werner

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 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.

Suggested Citation

  • Sinn, Hans-Werner, 1995. " A Theory of the Welfare State," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 495-526, December.
  • Handle: RePEc:bla:scandj:v:97:y:1995:i:4:p:495-526
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    References listed on IDEAS

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    1. Sinn, Hans-Werner, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Comment," American Economic Review, American Economic Association, pages 601-602.
    2. 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 434-434.
    3. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, pages 49-68.
    4. Roger H. Gordon & Alan S. Blinder, 1980. "Market wages, reservation wages, and retirement decisions," NBER Chapters,in: Econometric Studies in Public Finance, pages 277-308 National Bureau of Economic Research, Inc.
    5. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
    6. Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277-277.
    7. P. Diamond & J. Helms & J. Mirrlees, 1978. "Optimal Taxation in a Stochastic Economy: A Cobb-Douglas Example," Working papers 217, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. J. E. Stiglitz, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, Oxford University Press, vol. 83(2), pages 263-283.
    9. Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-328, November.
    10. Levy, Haim, 1989. "Two-Moment Decision Models and Expected Utility Maximization: Comment," American Economic Review, American Economic Association, pages 597-600.
    11. Goldin, Claudia, 1979. "Household and market production of families in a late nineteenth century American city," Explorations in Economic History, Elsevier, vol. 16(2), pages 111-131, April.
    12. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, pages 705-715.
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    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D6 - Microeconomics - - Welfare Economics

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