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EFFICIENCY–EQUALITY TRADE-OFF OF SOCIAL INSURANCE

Published online by Cambridge University Press:  01 November 2008

Radim Boháĉek
Radim Boháĉek*
Affiliation:
Economics Institute and Charles University
*
Address correspondence to: Radim Boháĉek, Economics Institute, The Academy of Sciences of the Czech Republic, Politickych veznu 7, 112 21 Prague 1, Czech Republic; e-mail: [email protected].
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Abstract

This paper studies the effects of social insurance policies on efficiency and distribution of resources in a general equilibrium model of a closed economy with heterogeneous agents and repeated moral hazard. I compare optimal allocations in stationary recursive equilibria for economies with different guaranteed minimum consumption levels (social insurance). I show that the efficiency–equality trade-off associated with social insurance does not hold: Efficiency and inequality decrease as the minimum guaranteed consumption increases to around one third of the average consumption. However, if social insurance expands even further, the efficiency loss becomes very high and inequality increases.

Keywords

Macroeconomic PolicyComputable General Equilibrium ModelsAsymmetric and Private InformationProvision and Effects of Welfare Programs
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008 , pp. 619 - 640
Copyright
Copyright © Cambridge University Press 2008

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