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Equilibrium social insurance with policy-motivated parties

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  • DE DONDER, Philippe
  • HINDRIKS, Jean

Abstract

We study the political economy of social insurance with double heterogeneity of voters (e.e., different income and risk levels). Social insurance is financed through distortionary taxation and redistributes across income and risks. Individuals vote over the extent of social insurance, which they can complement on the private market. Private insurance suffers from adverse selection which results into insurance rationing. We model political competition a la Wittman, with two parties maximizing the utility of their members. Party membership is endogenously determined. We show that although individuals differ in two dimensions, their preference for social insurance can be aggregated into a single dimensional type function. We then resort to numerical simulations to solve the political equilibrium outcome as a function of the distribution of income and risk. We obtain equilibrium policy differentiation with the Left party proposing more social insurance than the Right party. The Left party's equilibrium membership is made of low risk and high income individuals, with high risk and low income individuals forming the Right party's constituency. In equilibrium, each party is tying for winning. Unlike the median voter outcome, our equilibrium outcome depends on the whole income and risks distribution, and increasing income polarization leads both parties to propose less social insurance. We also compare the political equilibrium outcome with the Rawlsian and utilitarian outcomes.

Suggested Citation

  • DE DONDER, Philippe & HINDRIKS, Jean, 2006. "Equilibrium social insurance with policy-motivated parties," CORE Discussion Papers 2006033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2006033
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Niklas Potrafke, 2011. "Does government ideology influence budget composition? Empirical evidence from OECD countries," Economics of Governance, Springer, vol. 12(2), pages 101-134, June.
    2. Niklas Potrafke, 2012. "Political cycles and economic performance in OECD countries: empirical evidence from 1951–2006," Public Choice, Springer, vol. 150(1), pages 155-179, January.
    3. Potrafke, Niklas, 2010. "The growth of public health expenditures in OECD countries: Do government ideology and electoral motives matter?," Journal of Health Economics, Elsevier, vol. 29(6), pages 797-810, December.
    4. Niklas Potrafke, 2012. "Is German domestic social policy politically controversial?," Public Choice, Springer, vol. 153(3), pages 393-418, December.
    5. Becchetti, Leonardo & Conzo, Pierluigi & Salustri, Francesco, 2017. "The impact of health expenditure on the number of chronic diseases," Health Policy, Elsevier, vol. 121(9), pages 955-962.
    6. De Donder, Philippe & Gallego, Maria, 2017. "Electoral Competition and Party Positioning," TSE Working Papers 17-760, Toulouse School of Economics (TSE).
    7. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
    8. Christian Bjørnskov & Niklas Potrafke, 2012. "Political Ideology and Economic Freedom Across Canadian Provinces," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 38(2), pages 143-166.
    9. Niklas Potrafke, 2010. "Ideology and cultural policy," TWI Research Paper Series 49, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    10. Llavador, Humberto & Solano-García, Angel, 2011. "Immigration policy with partisan parties," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 134-142, February.
    11. Herwartz, Helmut & Theilen, Bernd, 2014. "Partisan influence on social spending under market integration, fiscal pressure and institutional change," European Journal of Political Economy, Elsevier, vol. 34(C), pages 409-424.
    12. Pau Olivella & Fred Schroyen, 2014. "Multidimensional Screening in a Monopolistic Insurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(1), pages 90-130, March.
    13. repec:eee:jcecon:v:45:y:2017:i:4:p:712-750 is not listed on IDEAS
    14. Angel Solano García, 2015. "Tax Morale with Partisan Parties," Hacienda Pública Española, IEF, vol. 213(2), pages 83-108, June.
    15. Herwartz, Helmut & Theilen, Bernd, 2017. "Ideology and redistribution through public spending," European Journal of Political Economy, Elsevier, vol. 46(C), pages 74-90.
    16. repec:eee:hapoch:v1_381 is not listed on IDEAS
    17. repec:gra:wpaper:13/06 is not listed on IDEAS
    18. Potrafke, Niklas, 2017. "Partisan politics: The empirical evidence from OECD panel studies," Journal of Comparative Economics, Elsevier, vol. 45(4), pages 712-750.
    19. Helmut Herwartz & Bernd Theilen, 2014. "Health Care And Ideology: A Reconsideration Of Political Determinants Of Public Healthcare Funding In The Oecd," Health Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 225-240, February.

    More about this item

    Keywords

    electoral competition; endogenous parties; Wittman equilibrium; social insurance; adverse selectio;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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