Mandated benefits, welfare, and heterogeneous firms

John Addison, Charles Richard Barrett and William Stanley Siebert

No 98-46, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: The paper constructs an asymmetric information model to investigate the efficiency and equity cases for government mandated benefits. A mandate can improve workers? insurance, and may also redistribute in favor of more "deserving" workers. The risk is that it may also reduce output. The more diverse are free market contracts - separating the various worker types - the more likely it is that such output effects will on balance serve to reduce welfare. It is shown that adverse effects can be mitigated by restricting mandates to "large" firms. An alternative to a mandate is direct government provision. We demonstrate that direct government provision may be superior to mandates by virtue of preserving separations.

Date: 1998
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