IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Does the Social Safety Net Improve Welfare?: A Dynamic General Equilibrium Analysis

Listed author(s):
  • Kai Zhao

    (University of Connecticut)

Registered author(s):

Does the social safety net improve welfare? Conventional wisdom says that means-tested social safety net programs improve welfare because they provide partial insurance against large negative shocks by guaranteeing a minimum consumption floor, but some economists have argued that they may also discourage labor supply and reduce capital accumulation (e.g. Hubbard, Skinner, and Zeldes (1995), Moffitt (2002)). Furthermore, recent research suggests that the welfare gain from the insurance channel may be small since the social safety net significantly crowds out private insurance decisions (e.g. Brown and Finkelstein (2008)). In this paper, I quantitatively assess the tradeoff between these channels in a dynamic general equilibrium model with incomplete markets and endogenous health insurance decision. I find that the social safety net generates a significant welfare loss, suggesting that the insurance channel is dominated by the other channels. I then show that the social safety net has a large crowding out effect on private health insurance, and this crowding out is important for obtaining the welfare loss result. I show that in a model with exogenous health insurance, the social safety net can generate a small welfare gain. I also find that the model can account for a puzzling fact about the US health insurance markets, that is, a large number of Americans do not have any health insurance. Since many Americans (who are currently not qualified for means-tested programs) would become qualified after being hit by large health expense shocks, they are better off not buying any health insurance. This finding challenges the popular view that policy makers should force the currently uninsured to buy private health insurance. A policy experiment in the calibrated model shows that the health insurance mandate, a central component of the recent US health care reform, reduces welfare.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 147.

in new window

Date of creation: 2013
Handle: RePEc:red:sed013:147
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed013:147. 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: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.