Hostname: page-component-77c89778f8-m42fx Total loading time: 0 Render date: 2024-07-17T15:45:51.702Z Has data issue: false hasContentIssue false
  • English
  • Français

EFFICIENCY–EQUALITY TRADE-OFF OF SOCIAL INSURANCE

Published online by Cambridge University Press:  01 November 2008

Radim Boháĉek
Radim Boháĉek*
Affiliation:
Economics Institute and Charles University
*
Address correspondence to: Radim Boháĉek, Economics Institute, The Academy of Sciences of the Czech Republic, Politickych veznu 7, 112 21 Prague 1, Czech Republic; e-mail: radim.bohacek@cerge-ei.cz.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper studies the effects of social insurance policies on efficiency and distribution of resources in a general equilibrium model of a closed economy with heterogeneous agents and repeated moral hazard. I compare optimal allocations in stationary recursive equilibria for economies with different guaranteed minimum consumption levels (social insurance). I show that the efficiency–equality trade-off associated with social insurance does not hold: Efficiency and inequality decrease as the minimum guaranteed consumption increases to around one third of the average consumption. However, if social insurance expands even further, the efficiency loss becomes very high and inequality increases.

Keywords

Macroeconomic PolicyComputable General Equilibrium ModelsAsymmetric and Private InformationProvision and Effects of Welfare Programs
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008 , pp. 619 - 640
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Aiyagari, R. S. and Alvarez, F. (1995) Stationary Efficient Distributions with Private Information: A Tale of Kings and Slaves. Manuscript, University of Minnesota.Google Scholar
Aiyagari, R. S. and Williamson, S. D. (1999) Credit in a random matching model with private information. Review of Economic Dynamics 2, 36–64.CrossRefGoogle Scholar
Alesina, A., Glaeser, E., and Sacerdote, B. (2001) Why doesn't the United States have a European-style welfare state? Brookings Papers on Economic Activity 2, 1–69.Google Scholar
Atkeson, A. (1991) International lending with moral hazard and risk of repudiation. Econometrica 9, 1069–1089.CrossRefGoogle Scholar
Atkeson, A. and Lucas, R. E. Jr., (1992) On efficient distribution with private information. Review of Economic Studies 59, 427–453.CrossRefGoogle Scholar
Atkeson, A. and Lucas, R. E. Jr., (1995) Efficiency and equality in a simple model of efficient unemployment insurance. Journal of Economic Theory 66, 64–98.CrossRefGoogle Scholar
Atkinson, A. (1995) Incomes and the welfare state: Essays on Britain and Europe. Cambridge, UK: Cambridge University Press.Google Scholar
Atkinson, A., Rainwater, L., and Smeeding, T. (1995) Income distribution in OECD countries: The evidence from the Luxembourg Income Study. Paris: OECD.Google Scholar
Bohacek, R. (2005) Capital accumulation in private information economies. Topics in Macroeconomics 5 (1), Article 24.CrossRefGoogle Scholar
Easterly, W. and Sewadeh, M. (2002) Global Development Network Growth Database. Washington, DC: World Bank.Google Scholar
Freeman, R. B., Topel, R., and Swedenborg, B. (Eds.) (1997) The welfare state in transition: Reforming the Swedish model (1st ed.). Chicago: NBER and The University of Chicago Press.CrossRefGoogle Scholar
Galbraith, J. K. and Kum, H. (2003) The University of Texas Inequality Project. Austin: The University of Texas.Google Scholar
Green, E. J. (1987) Lending and the smoothing of uninsurable income. In Prescott, E. and Wallace, N. (Eds.), Contractual arrangements for intertemporal trade. Minneapolis: University of Minnesota Press.Google Scholar
Huggett, M. (1997) The one-sector growth model with idiosyncratic shocks: Steady states and dynamics. Journal of Monetary Economics 39, 385–403.CrossRefGoogle Scholar
Kehoe, T. J. and Levine, D. K. (1993) Debt-constrained asset market. Review of Economic Studies 60, 865–888.CrossRefGoogle Scholar
Khan, A. and Ravikumar, B. (1997) Enduring Relationships in an Economy with Capital. Manuscript, University of Iowa.Google Scholar
Khan, A. and Ravikumar, B. (2001) Growth and risk-sharing with private information. Journal of Monetary Economics 47, 499–521.CrossRefGoogle Scholar
Kocherlakota, N. R. (2005) Zero expected wealth taxes: A mirrlees approach to dynamic optimal taxation. Econometrica 73, 1587–1621.CrossRefGoogle Scholar
Lindbeck, A. (1997) The Swedish experiment. Journal of Economic Literature 35, 1273–1319.Google Scholar
Lucas, R. E. Jr., (1992) On efficiency and distribution. The Economic Journal 102, 233–247.CrossRefGoogle Scholar
Mitchell, D. (1991) Income transfers in ten welfare states (1st ed.). Brookfield, VT: Avebury.Google Scholar
Nickell, S. and Layard, R. (1999) Labor market institutions and economic performance. In Ashenfelter, O. and Card, D. (Eds.), Handbook of labor economics, Volume 3C. Amsterdam: North-Holland.Google Scholar
OECD. (2002) Benefit and Wages, OECD Indicators. Paris: OECD.Google Scholar
Pavoni, N. (in press). On optimal unemployment compensation. Journal of Monetary Economics.Google Scholar
Phelan, C. (1998) On the long run implications of repeated moral hazard. Journal of Economic Theory 79, 174–191.CrossRefGoogle Scholar
Phelan, C. and Townsend, R. M. (1991) Computing multi-period, information-constrained optima. Review of Economic Studies 58, 853–881.CrossRefGoogle Scholar
Prescott, E. C. (1986) Theory ahead of business cycle measurement. Carnegie-Rochester Conference Series on Public Policy 25, 11–44.CrossRefGoogle Scholar
Prescott, E. C. and Townsend, R. M. (1984) Pareto optima and competitive equilibria with adverse selection and moral hazard. Econometrica 52, 21–45.CrossRefGoogle Scholar
Spear, E. and Srivastava, S. (1987) On repeated moral hazard with discounting. Review of Economic Studies 55, 599–617.CrossRefGoogle Scholar
Stokey, N. L., Lucas, R. E. Jr., and Prescott, E. C. (1989) Recursive methods in economic dynamics. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
Thomas, J. and Worrall, T. (1990) Income fluctuations and asymmetric information: An example of the repeated principal agent problem. Journal of Economic Theory 51, 367–390.CrossRefGoogle Scholar