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Social insurance with competitive insurance markets and risk misperception

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  • Cremer, Helmuth
  • Roeder, Kerstin

Abstract

We examine the role of uniform and non-uniform social insurance to supplement a general income tax when neither public nor private insurers can observe individual risk, which is positively correlated with wages (e.g., for old age dependency). In the (private market) Rothschild and Stiglitz (1976) equilibrium low-wage/low-risk individuals are not fully insured. While social insurance provided to the poor has a negative incentive effect, it also increases their otherwise insufficient insurance coverage. Social insurance to the rich produces exactly the opposite effects. Whichever of these effects dominates, some social insurance is always desirable irrespective of the pattern of correlation. Finally, we introduce risk misperception which exacerbates the failure of private markets. Rather surprisingly, this does not necessarily strengthen the case for public insurance.

Suggested Citation

  • Cremer, Helmuth & Roeder, Kerstin, 2017. "Social insurance with competitive insurance markets and risk misperception," Journal of Public Economics, Elsevier, vol. 146(C), pages 138-147.
  • Handle: RePEc:eee:pubeco:v:146:y:2017:i:c:p:138-147
    DOI: 10.1016/j.jpubeco.2016.12.009
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    Cited by:

    1. Aronsson, Thomas & Micheletto, Luca, 2017. "Optimal Redistributive Income Taxation and Efficiency Wages," Umeå Economic Studies 953, Umeå University, Department of Economics.
    2. repec:kap:itaxpf:v:25:y:2018:i:1:d:10.1007_s10797-017-9445-4 is not listed on IDEAS

    More about this item

    Keywords

    Social insurance; Optimal taxation; Adverse selection; Risk misperception;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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