Redistribution as Social Insurance and Capital Market Integration

University of Siena Economics Working Paper No. 404

18 Pages Posted: 12 Jan 2004

See all articles by Giampaolo Arachi

Giampaolo Arachi

Econpubblica - Università Bocconi; Università di Lecce - Dpto. di Scienze Economiche e Matematico-Statistiche

Massimo D'Antoni

University of Siena - Department of Economics

Date Written: October 2003

Abstract

In this paper we claim that increased economic integration can call for an increase in redistribution among workers. When individuals are risk averse and no human capital insurance is available, the share of workers who choose to invest in specific human capital will be inefficiently low. Redistribution among workers plays the role of the missing insurance market by making the investment in the specific skills more attractive. If on the one side increased capital mobility makes labour income taxation more distortionary, on the other, by increasing the variance of specific labour wage, it increases the scope for risk protection through redistribution. We show that the insurance effect of redistribution can be stronger than the distortionary effect, so that the optimal tax rate on labour income can increase when capital markets become more integrated.

Keywords: redistribution, Welfare State, international integration, specific investments in human capital

JEL Classification: H10, F20, J24

Suggested Citation

Arachi, Giampaolo and D'Antoni, Massimo, Redistribution as Social Insurance and Capital Market Integration (October 2003). University of Siena Economics Working Paper No. 404, Available at SSRN: https://ssrn.com/abstract=480782 or http://dx.doi.org/10.2139/ssrn.480782

Giampaolo Arachi

Econpubblica - Università Bocconi ( email )

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Università di Lecce - Dpto. di Scienze Economiche e Matematico-Statistiche ( email )

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Massimo D'Antoni (Contact Author)

University of Siena - Department of Economics ( email )

Piazza S. Francesco, 7
Siena, I-53100
Italy

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