Equilibrium Social Insurance with Policy-Motivated Parties
We study the political economy of social insurance with double heterogeneity of voters (i.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 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 partyâ€™s equilibrium membership is made of low risk and high income individuals, with high risk and low income individuals forming the Right partyâ€™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.
|Date of creation:||01 Feb 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +32 10473945
Web page: http://www.uclouvain.be/econ
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Caplin, Andrew & Nalebuff, Barry, 1997. "Competition among Institutions," Journal of Economic Theory, Elsevier, vol. 72(2), pages 306-342, February.
- Jean-Charles Rochet, 1991. "Incentives, Redistribution and Social Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(2), pages 143-165, December.
- Cremer, H. & Pestieau, P., .
"Redistributive taxation and social insurance,"
CORE Discussion Papers RP
-1235, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Persson, T. & Tabellini, G., 1993.
"Is Inequality Harmful for Growth,"
537, Stockholm - International Economic Studies.
- HINDRIKS, Jean & DE DONDER, Philippe, 2001.
"The politics of redistributive social insurance,"
CORE Discussion Papers
2001054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- DE DONDER, Philippe & HINDRIKS, Jean, . "The politics of redistributive social insurance," CORE Discussion Papers RP -1674, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- 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.
- Alberto Alesina & Dani Rodrik, 1991.
"Distributive Politics and Economic Growth,"
NBER Working Papers
3668, National Bureau of Economic Research, Inc.
- Miguel Gouveia, 1997.
"Majority rule and the public provision of a private good,"
Springer, vol. 93(3), pages 221-244, December.
- Gouveia, Miguel, 1997. " Majority Rule and the Public Provision of a Private Good," Public Choice, Springer, vol. 93(3-4), pages 221-44, December.
- John E. Roemer, 2004. "Modeling Party Competition in General Elections," Cowles Foundation Discussion Papers 1488, Cowles Foundation for Research in Economics, Yale University.
- Petretto, Alessandro, 1999. "Optimal social health insurance with supplementary private insurance," Journal of Health Economics, Elsevier, vol. 18(6), pages 727-745, December.
- Blomqvist, Ake & Horn, Henrik, 1984. "Public health insurance and optimal income taxation," Journal of Public Economics, Elsevier, vol. 24(3), pages 353-371, August.
- Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-65, November.
- Weingast, Barry R. & Wittman, Donald, 2008. "The Oxford Handbook of Political Economy," OUP Catalogue, Oxford University Press, number 9780199548477, March.
- Joel Shapiro, 2001. "Income maintenance programs and multidimensional screening," Economics Working Papers 544, Department of Economics and Business, Universitat Pompeu Fabra.
- Woojin Lee & John E. Roemer, 2005. "The Rise and Fall of Unionised Labour Markets: A Political Economy Approach," Economic Journal, Royal Economic Society, vol. 115(500), pages 28-67, 01.
- John E. Roemer, 2004.
"Distribution and Politics: A Brief History and Prospect,"
Cowles Foundation Discussion Papers
1487, Cowles Foundation for Research in Economics, Yale University.
- John Roemer, 2005. "Distribution and politics: a brief history and prospect," Social Choice and Welfare, Springer, vol. 25(2), pages 507-525, December.
- Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
- Ignacio Ortuño Ortín & John E. Roemer, 2000. "Endogenous Party Formation And The Effect Of Income Distribution On Policy," Working Papers. Serie AD 2000-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
When requesting a correction, please mention this item's handle: RePEc:ctl:louvec:2006018. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne DAVISTER-LOGIST)
If references are entirely missing, you can add them using this form.