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On the Political Economy of the Welfare State

Author

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  • Alvaro Forteza

Abstract

There is a widespread feeling that welfare states are distorting incentives to a larger extent than what is socially optimal. In the present paper, this idea is formally analyzed with a model in which a benevolent government seeks to maximize the utility of risk-averse-opportunistic agents. The government can redistribute output from the "lucky" to the "unlucky", providing insurance. Under commitment, the government optimizes before agents choose the level of effort. Aware of incentive problems, the government will typically provide incomplete insurance, in order to induce some effort above the minimum. Under discretion, the government reoptimizes after agents chose effort. Thus, it faces a pure risk-sharing problem and provides full insurance. Agents anticipate government's actions so they choose the minimum effort. Social welfare might be lower under discretion: there would be overinsurance.

Suggested Citation

  • Alvaro Forteza, 1994. "On the Political Economy of the Welfare State," Documentos de Trabajo (working papers) 0594, Department of Economics - dECON.
  • Handle: RePEc:ude:wpaper:0594
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    File URL: http://decon.edu.uy/publica/1994/Doc0594.pdf
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    References listed on IDEAS

    as
    1. Kokko, Ari & Tansini, Ruben & Zejan, Mario, 1994. "Productivity Spillovers from FDI in the Uruguayan Manufacturing Sector," SSE/EFI Working Paper Series in Economics and Finance 2, Stockholm School of Economics.
    2. Rosario Domingo & Héctor Pastori & Tabaré Vera, 1994. "Comportamiento estratégico de las empresas industriales frente a la apertura," Documentos de Trabajo (working papers) 0494, Department of Economics - dECON.
    3. María Inés Terra & Marcel Vaillant, 1994. "Cambios en el patrón de especialización regional. Viejas ventajas comparativas y nuevas economías de escala," Documentos de Trabajo (working papers) 0894, Department of Economics - dECON.
    4. María Inés Terra & Adriana Gigliotti, 1994. "Mercosur: localización de la producción. Un modelo de geografía económica," Documentos de Trabajo (working papers) 0794, Department of Economics - dECON.
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    Cited by:

    1. Kokko, Ari & Tansini, Ruben & Zejan, Mario, 1994. "Productivity Spillovers from FDI in the Uruguayan Manufacturing Sector," SSE/EFI Working Paper Series in Economics and Finance 2, Stockholm School of Economics.
    2. María Inés Terra & Adriana Gigliotti, 1994. "Mercosur: localización de la producción. Un modelo de geografía económica," Documentos de Trabajo (working papers) 0794, Department of Economics - dECON.

    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
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods

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