Taxation, Insurance and Precautionary Labor

Nick Netzer and Florian Scheuer

No 516, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We examine optimal taxation and social insurance if insurance markets are imperfect. This requires the development of a theory of labor supply under uncertainty. We show that the case for social insurance is not generally reinforced by adverse selection in insurance markets as social insurance will have welfare-decreasing effects on the labor market. Furthermore, positive and normative implications are highly sensitive to the insurance market equilibrium concept. While for the Rothschild-Stiglitz case social insurance at least alleviates the ineffciency of underinsurance, with a Wilson pooling equilibrium this ineffciency might even be worsened by social insurance. This sheds new light on the question whether social insurance is an appropriate means of redistribution in the presence of an optimally chosen tax schedule.

Keywords: Redistributive taxation; Social insurance; Adverse selection; Precautionary labor (search for similar items in EconPapers)
JEL-codes: D81 H21 H23 H50 J22 (search for similar items in EconPapers)
Pages: 37 p.
Date: 2005
New Economics Papers: this item is included in nep-ias, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Taxation, insurance, and precautionary labor (2007)
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