 Crowding out and crowding in: When does redistribution improve risk-sharing in limited commitment economies?Journal of Economic Theory, 2011, vol. 146, issue 3, 957-975 Abstract: When the risk of default constrains financial contracts, public insurance policies can significantly affect private risk-sharing. This is because by changing income expectations and volatility, redistribution changes the attractiveness of default and thus endogenous borrowing constraints. Extending results by Krueger and Perri (2011) [8], this paper analyses the conditions under which redistribution can improve private insurance by making default less attractive to the income-rich, whose income it reduces. I first explain why public redistribution typically crowds out private insurance in the two-income economy, and identify the role of income persistence and saving after default. Second, I show how, in endowment economies with three income states or more and in economies with capital, redistributive taxes can improve, or "crowd in", private consumption insurance. Finally, in a quantitative exercise using a realistic income process calibrated to US micro-data, moderate redistribution crowds in private insurance with production but not in an endowment economy. Keywords: Insurance; Default; Limited; enforcement; Redistribution; Fiscal; policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:146:y:2011:i:3:p:957-975 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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