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Optimal Taxation and Social Insurance with Endogenous Private Insurance

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  • Saez, Emmanuel
  • Chetty, Nadarajan

Abstract

This paper characterizes the welfare gains from redistributive taxation and social insurance in an environment where the private sector provides partial insurance. We analyze stylized models in which adverse selection, pre-existing information, or imperfect optimization in private insurance markets create a role for government intervention. We derive simple formulas that map reduced-form empirical estimates into quantitative predictions for optimal tax and social insurance policy. Applications to unemployment and health insurance show that taking private market insurance into account matters significantly for optimal benefit levels given existing empirical estimates of the key parameters.

Suggested Citation

  • Saez, Emmanuel & Chetty, Nadarajan, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," Scholarly Articles 9696326, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:9696326
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    Cited by:

    1. Cremer, Helmuth & Roeder, Kerstin, 2017. "Social insurance with competitive insurance markets and risk misperception," Journal of Public Economics, Elsevier, pages 138-147.
    2. Raj Chetty, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 451-488, May.
    3. Pichler, Stefan & Ziebarth, Nicolas R., 2017. "The pros and cons of sick pay schemes: Testing for contagious presenteeism and noncontagious absenteeism behavior," Journal of Public Economics, Elsevier, pages 14-33.
    4. Ortigueira, Salvador & Siassi, Nawid, 2013. "How important is intra-household risk sharing for savings and labor supply?," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 650-666.
    5. Raj Chetty & Emmanuel Saez, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Chapters,in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 85-114 National Bureau of Economic Research, Inc.
    6. Craig, Steven G. & Hemissi, Wided & Mukherjee, Satadru & Sørensen, Bent E., 2016. "How do politicians save? Buffer-stock management of unemployment insurance finance," Journal of Urban Economics, Elsevier, vol. 93(C), pages 18-29.
    7. Campos, Rodolfo G. & Reggio, Iliana, 2016. "Optimal unemployment insurance: Consumption versus expenditure," Labour Economics, Elsevier, vol. 38(C), pages 81-89.
    8. Giuseppe Bertola & Winfried Koeniger, 2015. "Hidden insurance in a moral-hazard economy," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 777-790, October.
    9. Lawson, Nicholas, 2015. "Social program substitution and optimal policy," Labour Economics, Elsevier, vol. 37(C), pages 13-27.
    10. Liran Einav & Amy Finkelstein & Mark R. Cullen, 2008. "Estimating Welfare in Insurance Markets Using Variation in Prices," NBER Working Papers 14414, National Bureau of Economic Research, Inc.
    11. Nick Netzer & Florian Scheuer, 2010. "Competitive screening in insurance markets with endogenous wealth heterogeneity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(2), pages 187-211, August.
    12. Guler, Bulent & Taskin, Temel, 2013. "Does unemployment insurance crowd out home production?," European Economic Review, Elsevier, pages 1-16.
    13. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    14. Hsu, Minchung & Yang, C.C., 2013. "Optimal linear and two-bracket income taxes with idiosyncratic earnings risk," Journal of Public Economics, Elsevier, vol. 105(C), pages 58-71.
    15. Böckerman, Petri & Kanninen, Ohto & Suoniemi, Ilpo, 2014. "A Kink that Makes You Sick: the Effect of Sick Pay on Absence in a Social Insurance System," MPRA Paper 61010, University Library of Munich, Germany.
    16. Casey B. Mulligan, 2009. "Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?," NBER Working Papers 15281, National Bureau of Economic Research, Inc.
    17. Craig, Steven G. & Hoang, Edward C., 2011. "State government response to income fluctuations: Consumption, insurance, and capital expenditures," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 343-351, July.
    18. Brandon Lehr, 2016. "Optimal Social Insurance for Heterogeneous Agents With Private Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(2), pages 301-333, June.
    19. Goulão, Catarina, 2014. "Voluntary Public Health Insurance," TSE Working Papers 14-488, Toulouse School of Economics (TSE).
    20. repec:hrv:faseco:34330197 is not listed on IDEAS
    21. Robin Boadway, 2012. "Recent Advances in Optimal Income Taxation," Hacienda Pública Española, IEF, vol. 200(1), pages 15-39, March.
    22. Giuseppe Bertola & Anna Lo Prete, 2013. "Finance, governments, and trade," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), pages 273-294.
    23. Catarina Goulão, 2015. "Voluntary public health insurance," Public Choice, Springer, vol. 162(1), pages 135-157, January.
    24. Michau, Jean-Baptiste, 2015. "Optimal labor market policy with search frictions and risk-averse workers," Labour Economics, Elsevier, vol. 35(C), pages 93-107.
    25. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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