Social insurance with competitive insurance markets and risk misperception

Helmuth Cremer and Kerstin Roeder

Journal of Public Economics, 2017, vol. 146, issue C, 138-147

Abstract: We examine the role of uniform and non-uniform social insurance to supplement a general income tax when neither public nor private insurers can observe individual risk, which is positively correlated with wages (e.g., for old age dependency). In the (private market) Rothschild and Stiglitz (1976) equilibrium low-wage/low-risk individuals are not fully insured. While social insurance provided to the poor has a negative incentive effect, it also increases their otherwise insufficient insurance coverage. Social insurance to the rich produces exactly the opposite effects. Whichever of these effects dominates, some social insurance is always desirable irrespective of the pattern of correlation. Finally, we introduce risk misperception which exacerbates the failure of private markets. Rather surprisingly, this does not necessarily strengthen the case for public insurance.

Keywords: Social insurance; Optimal taxation; Adverse selection; Risk misperception (search for similar items in EconPapers)
JEL-codes: D82 H21 H51 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Social insurance with competitive insurance markets and risk misperception (2016)
Working Paper: Social Insurance with Competitive Insurance Markets and Risk Misperception (2016)
Working Paper: Social insurance with competitive insurance markets and risk misperception (2016)
Working Paper: Social Insurance with Competitive Insurance Markets and Risk Misperception (2016)
Working Paper: Social insurance with competitive insurance markets and risk misperception (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:146:y:2017:i:c:p:138-147

DOI: 10.1016/j.jpubeco.2016.12.009

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