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The Welfare State in a Changing Environment

  • Thomas Eichner


  • Andreas Wagener


We analyse how the welfare state, i.e., social insurance that works through redistributive taxation, should respond to increases in risks and to increases in the cost of operating the welfare state. With respect to risks, we distinguish between risks that can be insured and such that cannot (background risks). Insurable risks can be reduced by costly individual self-insurance and by costly social insurance. We show: (i) Self-insurance will be higher the more costly is the welfare state and the larger are background or insured risks. (ii) Full social insurance can only be optimal in a costless welfare state. (iii) The optimal welfare state is not necessarily larger the less costly it is. (iv) The welfare state need not optimally expand when risks increase that it insures. (v) It should, however, expand when risks increase that it does not insure.

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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 11 (2004)
Issue (Month): 3 (05)
Pages: 313-331

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Handle: RePEc:kap:itaxpf:v:11:y:2004:i:3:p:313-331
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  1. Sinn, Hans-Werner, 1996. "Social Insurance, Incentives and Risk Taking," Munich Reprints in Economics 19834, University of Munich, Department of Economics.
  2. Luisa Tibiletti, 1995. "Beneficial changes in random variables via copulas: An application to insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 20(2), pages 191-202, December.
  3. Robert Holzmann & Steen Jørgensen, 2001. "Social Risk Management: A New Conceptual Framework for Social Protection, and Beyond," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 529-556, August.
  4. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September.
  5. Burgoon, Brian, 2001. "Globalization and Welfare Compensation: Disentangling the Ties that Bind," International Organization, Cambridge University Press, vol. 55(03), pages 509-551, June.
  6. Hans-Werner Sinn, 2002. "The New Systems Competition," NBER Working Papers 8747, National Bureau of Economic Research, Inc.
  7. Sinn, Hans-Werner, 1995. "A Theory of the Welfare State," CEPR Discussion Papers 1278, C.E.P.R. Discussion Papers.
  8. Wagener, Andreas, 2003. "Comparative statics under uncertainty: The case of mean-variance preferences," European Journal of Operational Research, Elsevier, vol. 151(1), pages 224-232, November.
  9. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  10. Sinn, Hans-Werner, 1990. "Expected utility, μ-σ preferences, and linear distribution classes: A further result," Munich Reprints in Economics 19847, University of Munich, Department of Economics.
  11. Thomas Eichner & Andreas Wagener, 2003. "Variance Vulnerability, Background Risks, and Mean-Variance Preferences," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(2), pages 173-184, December.
  12. Mirrlees, J A, 1990. "Taxing Uncertain Incomes," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 34-45, January.
  13. Sanjit Dhami, 2002. "Optimal Consumption Taxes and Social Security Under Tax Measurement Problems and Uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(6), pages 673-685, November.
  14. Bird, Edward J., 2001. "Does the welfare state induce risk-taking?," Journal of Public Economics, Elsevier, vol. 80(3), pages 357-383, June.
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