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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 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
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102915

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  1. Sanjit Dhami, 2002. "Optimal Consumption Taxes and Social Security Under Tax Measurement Problems and Uncertainty," International Tax and Public Finance, Springer, vol. 9(6), pages 673-685, November.
  2. Thomas Eichner & Andreas Wagener, 2003. "Variance Vulnerability, Background Risks, and Mean-Variance Preferences," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 28(2), pages 173-184, December.
  3. Mirrlees, J A, 1990. "Taxing Uncertain Incomes," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 34-45, January.
  4. Robert Holzmann & Steen Jørgensen, 2001. "Social Risk Management: A New Conceptual Framework for Social Protection, and Beyond," International Tax and Public Finance, Springer, vol. 8(4), pages 529-556, August.
  5. 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.
  6. Bird, Edward J., 2001. "Does the welfare state induce risk-taking?," Journal of Public Economics, Elsevier, vol. 80(3), pages 357-383, June.
  7. Burgoon, Brian, 2001. "Globalization and Welfare Compensation: Disentangling the Ties that Bind," International Organization, Cambridge University Press, vol. 55(03), pages 509-551, June.
  8. Luisa Tibiletti, 1995. "Beneficial changes in random variables via copulas: An application to insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 20(2), pages 191-202, December.
  9. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  10. 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.
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