Credible Social Insurance

29 Pages Posted: 2 Nov 2005

See all articles by Christopher M. Sleet

Christopher M. Sleet

Carnegie Mellon University - David A. Tepper School of Business

Sevin Yeltekin

Carnegie Mellon University - David A. Tepper School of Business

Date Written: August 2005

Abstract

This paper considers the credibility of social insurance arrangements in a dynamic moral hazard economy. A utilitarian planner selects an allocation for agents who experience privately observed taste shocks. When the planner can commit the optimal allocation exhibits an immiseration property: with probability 1 an agent's continuation utility will drift downwards to its minimal level. Thus, the ex ante optimal provision of incentives implies severe ex post inequality and is time inconsistent. When the planner cannot commit, the best credible outcome is very different. Ex post consumption and utility allocations are much less dispersed. Thus, a lack of planner commitment is a force for ex post equality.

Keywords: Credible policy, inequality, time consistent, moral hazard

JEL Classification: C73, D82, E62

Suggested Citation

Sleet, Christopher M. and Yeltekin, Sevin, Credible Social Insurance (August 2005). Available at SSRN: https://ssrn.com/abstract=832764 or http://dx.doi.org/10.2139/ssrn.832764

Christopher M. Sleet

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://business.tepper.cmu.edu/display_faculty.aspx?id=244

Sevin Yeltekin (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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