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Social insurance and redistribution with moral hazard and adverse selection

  • BOADWAY, Robin
  • LEITE-MONTEIRO, Manuel
  • MARCHAND, Maurice
  • PESTIEAU, Pierre

Rochet (1989) showed that with distortionary income taxes, social insurance is a desirable redistributive device when risk and ability are negatively correlated. This finding is reexamined when ex post moral hazard and adverse selection are included, and under different informational assumptions. Individuals can take actions influencing the size of the loss in the event of accident (or ill health). Social insurance can be supplemented by private insurance, but private insurance markets are affected by both adverse selection and moral hazard. We study how equity and efficiency considerations should be traded off in choosing the optimal coverage of social insurance when those features are introduced. The case for social insurance is strongest when the government is well informed about household productivity.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2004083.

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Date of creation: 00 Dec 2004
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Handle: RePEc:cor:louvco:2004083
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  1. BOADWAY, Robin & LEITE-MONTEIRO, Manuel & MARCHAND, Maurice & PESTIEAU, Pierre, 2001. "Social insurance and redistribution," CORE Discussion Papers 2001041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. David M. Cutler, 2002. "Health Care and the Public Sector," NBER Working Papers 8802, National Bureau of Economic Research, Inc.
  3. B. Dahlby, 1981. "Adverse selection and Pareto improvements through compulsory insurance," Public Choice, Springer, vol. 37(3), pages 547-558, January.
  4. Olivia S. Mitchell, 1998. "Administrative Costs in Public and Private Retirement Systems," NBER Chapters, in: Privatizing Social Security, pages 403-456 National Bureau of Economic Research, Inc.
  5. Petretto, Alessandro, 1999. "Optimal social health insurance with supplementary private insurance," Journal of Health Economics, Elsevier, vol. 18(6), pages 727-745, December.
  6. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
  7. CREMER, Helmuth & PESTIEAU, Pierre, 1995. "Redistributive Taxation and Social Insurance," CORE Discussion Papers 1995054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Jean Hindriks & Philippe De Donder, 2001. "The Politics of Redistributive Social Insurance," Working Papers 444, Queen Mary University of London, School of Economics and Finance.
  9. Diamond, Peter, 1992. "Organizing the Health Insurance Market," Econometrica, Econometric Society, vol. 60(6), pages 1233-54, November.
  10. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
  11. Blomqvist, Ake & Horn, Henrik, 1984. "Public health insurance and optimal income taxation," Journal of Public Economics, Elsevier, vol. 24(3), pages 353-371, August.
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