On the optimal provision of social insurance

Dirk Krueger and Alexander Ludwig

No 110 [rev.], SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.

Keywords: Progressive Taxation; Education Subsidy; Transitional Dynamics (search for similar items in EconPapers)
JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Date: 2015, Revised 2015
New Economics Papers: this item is included in nep-dge, nep-edu, nep-ias, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: On the Optimal Provision of Social Insurance (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:110r

DOI: 10.2139/ssrn.2623069

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