Increases in Risk and the Welfare State

25 Pages Posted: 19 May 2002

See all articles by Thomas Eichner

Thomas Eichner

University of Siegen - School of Economic Disciplines

Andreas Wagener

Leibniz Universität Hannover - Economics and Business Administration Area; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Vienna University of Economics and Business Administration

Date Written: March 2002

Abstract

According to many observers the world is currently becoming more risky in many ways. In this paper we analyse how the welfare state, i.e. social insurance which works through redistributive taxation, should deal with this trend. We distinguish between risks that can be insured by the welfare state and those that cannot (background risks). Insurable risks can be reduced either by individual self-insurance or through pooling, by social insurance. Both ways are costly in terms of income forfeited. We show: (i) The more costly the welfare state is and the larger the background or insured risks are, the higher self-insurance will be. (ii) Full risk coverage by the welfare state can only be optimal in a costless welfare state. (iii) The optimal size of the welfare state is larger the higher the risks are that it cannot insure. The impact of the size of risks that cannot be insured is however unclear.

Keywords: Welfare State, Background Risks, Social Insurance

JEL Classification: H53, D63, D8

Suggested Citation

Eichner, Thomas and Wagener, Andreas, Increases in Risk and the Welfare State (March 2002). CESifo Working Paper Series No. 685. Available at SSRN: https://ssrn.com/abstract=306521

Thomas Eichner

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

Andreas Wagener (Contact Author)

Leibniz Universität Hannover - Economics and Business Administration Area ( email )

Koenigsworther Platz 1
30167 Hannover
Germany

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

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Vienna University of Economics and Business Administration ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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