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Multiple Equilibria in the Welfare State

Author

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  • Alvaro Forteza

    () (Departmento de Economía, Facultad de Ciencias Sociales, Universidad de la República)

Abstract

Excess distortions in the welfare state might be the consequence of the government's lack of ability to commit not to help "unlucky" agents. Incentive considerations that are crucial in standard insurance in the presence of moral hazard, plays no role in this case. As a consequence, the government might provide too much insurance. Still, equilibria with incomplete insurance and above-minimum effort might arise. Two possible reasons for multiple equilibria are explored in the paper, namely that marginal utility of consumption is positively associated with effort and that economic policy is costly. It is shown that the equilibria can be Pareto rankable. Borrowing analytical tools from recent developments in dynamic games (Matsui and Matsuyama, 1995), stability conditions of different equilibria are analyzed.

Suggested Citation

  • Alvaro Forteza, 1995. "Multiple Equilibria in the Welfare State," Documentos de Trabajo (working papers) 0395, Department of Economics - dECON.
  • Handle: RePEc:ude:wpaper:0395
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    File URL: http://decon.edu.uy/publica/1995/Doc0395.pdf
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    References listed on IDEAS

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    1. Lincoln Bizzozero & Marcel Vaillant, 1995. "Unión Europea y MERCOSUR. Integración de Bloques Comerciales: nueva y pragmática orientación de las relaciones Norte- Sur," Documentos de Trabajo (working papers) 1095, Department of Economics - dECON.
    2. Walter Garcia Fontes & Ruben Tansini & Marcel Vaillant, 1995. "Trade liberalization in Uruguay: Domestic and foreign firms," Economics Working Papers 173, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Walter Garcia Fontes & Ruben Tansini & Marcel Vaillant, 1994. "Cross-industry entry: The case of a small developing economy," Economics Working Papers 103, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Patricia Triunfo, 1997. "Sistema bancario privado uruguayo: un estudio de sus costos," Estudios de Economia, University of Chile, Department of Economics, vol. 24(1 Year 19), pages 85-117, June.
    5. A Kokko & Ruben Tansini & Mario Zejan, 1995. "Trade regimes and effects of FDI: evidence from Uruguay," Documentos de Trabajo (working papers) 0695, Department of Economics - dECON.
    6. Gustavo Bittencourt, 1995. "Inversión extranjera en manufacturas en América Latina. Un estudio de sus determinantes," Documentos de Trabajo (working papers) 0295, Department of Economics - dECON.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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