A Theory of the Welfare State

40 Pages Posted: 9 Jul 2000 Last revised: 10 Apr 2022

See all articles by Hans-Werner Sinn

Hans-Werner Sinn

CESifo (Center for Economic Studies and Ifo Institute); National Bureau of Economic Research (NBER); Ludwig Maximilian University of Munich (LMU)

Date Written: September 1994

Abstract

The welfare state can be seen as an insurance device that makes lifetime careers safer, increases risk taking and suffers from moral hazard effects. Adopting this view, the paper studies the trade-off between average income and inequality, evaluating redistributive equilibria from an allocative point of view. It identifies the properties of an optimal welfare state and shows that constant returns to risk taking are likely to imply a redistribution paradox where more redistribution results in more inequality. In general, optimal taxation will either imply that the redistribution paradox is present or that the economy operates at a point of its efficiency frontier where more inequality implies a lower average income.

Suggested Citation

Sinn, Hans-Werner, A Theory of the Welfare State (September 1994). NBER Working Paper No. w4856, Available at SSRN: https://ssrn.com/abstract=226508

Hans-Werner Sinn (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Ludwig Maximilian University of Munich (LMU)

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