Informal Family Insurance and the Design of the Welfare State

Oxford Univ. Applied Econ. Discussion Paper No. 195

30 Pages Posted: 9 Sep 2001

See all articles by Robert MacCulloch

Robert MacCulloch

Imperial College London - Tanaka Business School

Rafael Di Tella

Harvard Business School - Business, Government and the International Economy Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2001

Abstract

We study the problem of unemployment benefit provision when the family is also a provider of social insurance. As a benchmark, a simple model is presented where risk-sharing motives govern intra-family transfers and more generous unemployment benefits, provided by the State, crowd out family risk-sharing arrangements one-for-one. The model is then extended to capture the idea that the State has an advantage vis-a-vis the family in the provision of insurance because it can tax individuals, whereas the family must rely on self-enforcing agreements. In this case, the effect of State transfers on intra-family transfers is found to be more than one-for-one. Thus, somewhat perversely, both informal transfers and total insurance transfers to the unemployed fall as the State's generosity increases. This does not imply that the optimal size of the Welfare State is zero. Our results still hold when families are assumed to be better than the State at monitoring the job search activities of the unemployed.

Keywords: Self-enforcing contracts, Optimal welfare generosity

JEL Classification: H42, H53, D1, I38

Suggested Citation

MacCulloch, Robert and Di Tella, Rafael, Informal Family Insurance and the Design of the Welfare State (May 16, 2001). Oxford Univ. Applied Econ. Discussion Paper No. 195. Available at SSRN: https://ssrn.com/abstract=282669 or http://dx.doi.org/10.2139/ssrn.282669

Robert MacCulloch (Contact Author)

Imperial College London - Tanaka Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Rafael Di Tella

Harvard Business School - Business, Government and the International Economy Unit ( email )

Cambridge, MA
United States
617-495-5048 (Phone)
617-496-5985 (Fax)

HOME PAGE: http://www.people.hbs.edu/rditella/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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