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Government discretionary transfers and overinsurance

Listed author(s):
  • Álvaro Forteza

Excess distortions in government transfer policies might result from the government lack of ability to commit not to help unlucky agents. Incentive considerations that are crucial in standard insurance in the presence of moral hazard play, no role in this case. A benevolent government that sets transfers after agents have chosen their effort faces a pure risk-sharing problem and provides full insurance, inducing too little effort. The lack of commitment ability might also cause indeterminacy: the economy might end in any of several equilibria, without the government being able to push it to a particular one.

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Article provided by University of Chile, Department of Economics in its journal Estudios de Economia.

Volume (Year): 26 (1999)
Issue (Month): 1 Year 1999 (June)
Pages: 27-44

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Handle: RePEc:udc:esteco:v:26:y:1999:i:1:p:27-44
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