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Taxation, Insurance and Precautionary Labor

  • Nick Netzer
  • Florian Scheuer

We examine optimal taxation and social insurance if insurance markets are imperfect. This requires the development of a theory of labor supply under uncertainty. We show that the case for social insurance is not generally reinforced by adverse selection in insurance markets as social insurance will have welfare-decreasing effects on the labor market. Furthermore, positive and normative implications are highly sensitive to the insurance market equilibrium concept. While for the Rothschild-Stiglitz case social insurance at least alleviates the ineffciency of underinsurance, with a Wilson pooling equilibrium this ineffciency might even be worsened by social insurance. This sheds new light on the question whether social insurance is an appropriate means of redistribution in the presence of an optimally chosen tax schedule.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.43722.de/dp516.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 516.

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Length: 37 p.
Date of creation: 2005
Date of revision:
Handle: RePEc:diw:diwwpp:dp516
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  1. Crocker, Keith J. & Snow, Arthur, 1985. "The efficiency of competitive equilibria in insurance markets with asymmetric information," Journal of Public Economics, Elsevier, vol. 26(2), pages 207-219, March.
  2. David M. Cutler & Jonathan Gruber, 1995. "Does Public Insurance Crowd Out Private Insurance?," NBER Working Papers 5082, National Bureau of Economic Research, Inc.
  3. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  4. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  5. Henriet, D. & Rochet, J.-C., 1998. "Is Public Health Insurance an Appropriate Instrument for Redistribution," Papers 98.512, Toulouse - GREMAQ.
  6. Helmuth Cremer & Pierre Pestieau, 1996. "Redistributive taxation and social insurance," International Tax and Public Finance, Springer, vol. 3(3), pages 281-295, July.
  7. Andrew B. Abel, 1988. "The Implications of Insurance for the Efficacy of Fiscal Policy," NBER Working Papers 2517, National Bureau of Economic Research, Inc.
  8. Nick Netzer & Florian Scheuer, 2005. "Taxation, Insurance and Precautionary Labor," Discussion Papers of DIW Berlin 516, DIW Berlin, German Institute for Economic Research.
  9. 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.
  10. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  11. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March.
  12. Simon C. Parker & Yacine Belghitar & Tim Barmby, 2005. "Wage Uncertainty and the Labour Supply of Self-Employed Workers," Economic Journal, Royal Economic Society, vol. 115(502), pages C190-C207, 03.
  13. Robin Boadway & Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2006. "Social Insurance and Redistribution with Moral Hazard and Adverse Selection," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(2), pages 279-298, 07.
  14. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  15. Eaton, Jonathan & Rosen, Harvey S., 1980. "Labor supply, uncertainty, and efficient taxation," Journal of Public Economics, Elsevier, vol. 14(3), pages 365-374, December.
  16. Jean-Charles Rochet, 1991. "Incentives, Redistribution and Social Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(2), pages 143-165, December.
  17. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  18. Hartwick, John M., 2000. "Labor supply under wage uncertainty," Economics Letters, Elsevier, vol. 68(3), pages 319-325, September.
  19. Jonathan Eaton & Harvey S. Rosen, 1979. "Notes on Optimal Wage Taxation and Uncertainty," NBER Working Papers 0388, National Bureau of Economic Research, Inc.
  20. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-38, May.
  21. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
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