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The welfare effect of income tax deductions for losses as insurance: Insured- versus insurer-sided adverse selection

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  • Wu, T.C. Michael
  • Yang, C.C.

Abstract

Kaplow (1992) shows in a complete-information environment that allowing income tax deductions for losses as partial insurance is undesirable in the presence of private insurance markets. This paper elaborates on Kaplow's finding by studying two extreme types of asymmetric information structures in private insurance markets: Either the insured or insurers possess superior information. It is shown that our derived result is consistent with Kaplow's if the insured have superior information; however, Kaplow's negative conclusion with respect to the income tax deduction will be overturned if insurers have superior information instead. A policy implication from our finding is that whether or not to allow an income tax deduction for losses needs to be more refined and, specifically, it should be tailored to the “adverse selection” information structures of private insurance.

Suggested Citation

  • Wu, T.C. Michael & Yang, C.C., 2012. "The welfare effect of income tax deductions for losses as insurance: Insured- versus insurer-sided adverse selection," Economic Modelling, Elsevier, vol. 29(6), pages 2641-2645.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2641-2645
    DOI: 10.1016/j.econmod.2012.08.011
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    References listed on IDEAS

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    Cited by:

    1. Wu, T.C. Michael & Yang, C.C., 2014. "Income tax deductions for losses as insurance revisited," Economic Modelling, Elsevier, vol. 41(C), pages 274-280.

    More about this item

    Keywords

    Income tax deductions for losses; Informed insurer; Adverse selection;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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