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Optimal Taxation and Social Insurance with Endogenous Private Insurance

In: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES)

  • Raj Chetty
  • Emmanuel Saez

We characterize welfare gains from government intervention when the private sector provides partial insurance. We analyze models in which adverse selection, pre-existing information, or imperfect optimization create a role for government intervention. We derive formulas that map existing empirical estimates into quantitative predictions for optimal policy. When private insurance generates moral hazard, standard formulas for optimal government insurance must be modified to account for fiscal externalities. In contrast, standard formulas are unaffected by "informal" private insurance that does not generate moral hazard. Applications to health and unemployment show that formal private market insurance can significantly reduce optimal government benefit rates. (JEL D82, G22, H21, H23, J65)

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This chapter was published in:
  • Roger Gordon & Thomas Piketty, 2010. "Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES)," NBER Books, National Bureau of Economic Research, Inc, number gord08-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12118.
    Handle: RePEc:nbr:nberch:12118
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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