Credible social insurance

Christopher Sleet

No 75, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: Social insurance arrangements that are optimal from the perspective of a utilitarian planner confronting a population of privately informed agents frequently exhibit an "immiseration" property - with probability 1 an agent's continuation utility will drift downwards to its minimal level. Thus, the ex ante optimal provision of incentives implies severe ex post inequality and are time inconsistent. This paper introduces an additional friction: it assumes that the utilitarian planner can not commit. To analyse the problem without planner commitment, concepts from the dynamic contracting and sustainable plans literature are blended and the planner's problem is embedded into a policy game. Allocations can be supported as equilibria of this game if they satisfy a bound on the continuation payoffs of the planner. The optimal sustainable allocation does not exhibit immiseration. Credibility or sustainability constraints on the utilitarian planner translate into greater ex post equality than would otherwise occur.

Keywords: Macroeconomic policy; dynamic contracting (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2004
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