Public Versus Private Risk Sharing
40 Pages Posted: 15 Dec 2009 Last revised: 29 Jan 2023
There are 2 versions of this paper
Public Versus Private Risk Sharing
Public Versus Private Risk Sharing
Date Written: December 2009
Abstract
Can public insurance through redistributive income taxation improve the allocation of risk in an economy in which private risk sharing is limited? The answer depends crucially on the fundamental friction that limits private risk sharing in the first place. If risk sharing is incomplete because some insurance markets are missing for model-exogenous reasons (as in Bewley, 1986 and Aiyagari, 1994) publicly provided risk sharing via a tax system generally improves on the allocation of risk. If instead private insurance markets exist but their use is limited by the absence of complete enforcement (as in Kehoe and Levine, 1993 and Kocherlakota, 1996) then the provision of public insurance can crowd out private insurance to such an extent that total consumption insurance is reduced. By reducing income risk the tax system increases the value of being excluded from private insurance markets and hence weakens the enforcement mechanism of these contracts. In this paper we theoretically characterize and numerically compute equilibria in an economy with limited enforcement and a continuum of agents facing realistic income risk and tax systems with various degrees of risk reduction (progressivity). We find that the crowding-out effect of public insurance on private insurance in the limited enforcement model can be quantitatively important, as is the positive insurance effect of taxation in the Bewley model.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Relative Wage Movements and the Distribution of Consumption
By Orazio Attanasio and Stephen J. Davis
-
Consumption and Risk Sharing Over the Life Cycle
By Kjetil Storesletten, Chris Telmer, ...
-
Intertemporal Choice and Inequality
By Angus Deaton and Christina Paxon
-
Partial Insurance, Information, and Consumption Dynamics
By Richard W. Blundell, Luigi Pistaferri, ...
-
Does Income Inequality Lead to Consumption Inequality? Evidence and Theory
By Dirk Krueger and Fabrizio Perri
-
Does Income Inequality Lead to Consumption Inequality? Evidence and Theory
By Dirk Krueger and Fabrizio Perri
-
Does Income Inequality Lead to Consumption Inequality? Evidence and Theory
By Dirk Krueger and Fabrizio Perri
-
Income Variance Dynamics and Heterogeneity
By Costas Meghir and Luigi Pistaferri
-
Rising Inequality? Changes in the Distribution of Income and Consumption in the 1980s
By David M. Cutler and Lawrence F. Katz
-
The Macroeconomic Implications of Rising Wage Inequality in the United States
By Jonathan Heathcote, Kjetil Storesletten, ...