Welfare stigma and risk taking in the welfare state

The welfare state provides social insurance for lifetime risks. In that framework welfare stigma in form of a social norm against living off (net-)transfers is introduced, and the impact of welfare stigma on self-insurance and social insurance that works through redistributive taxation is analyzed. It turns out that introducing welfare stigma reduces the socially optimal self-insurance and raises the socially optimal social insurance. It may be efficient for the society to operate at a point on its opportunity frontier where an increase in risk taking decreases mean post-tax income and welfare stigma. In the presence of moral hazard self-insurance efforts are invariant with respect to welfare stigma whereas social insurance increases upon introducing welfare stigma. Furthermore, it is shown that self-insurance and social insurance are inefficiently low or high depending on the preference intensity of the social norm.[Figure not available: see fulltext.] Copyright Springer-Verlag Berlin Heidelberg 2015