On the Feasibility of a Liberal Welfare State: Agency and Exit Costs in Income Security Clubs

Abstract

This paper investigates whether individuals might voluntarily join and re-main members of a state in which high levels of social insurance are pro-vided. That is to say, are there plausible circumstances in which a social welfare state can be regarded as "liberal" in the sense that it has the univer-sal support of its citizens?

As a point of departure, the paper demonstrates that risk-averse in-dividuals in a setting of substantial income or health uncertainty will volun-tarily join private income-security clubs. Private income-security clubs, how-ever, cannot be entirely voluntary because they must solve the problem of adverse selection, as with entry or exit fees. The paper demonstrates that individuals may opt for governmental provision of income security ser-vices, when there is uncertainty about the quality of private club services, because naturally high exit costs allow national governments to economi-cally address the problem of adverse selection. The analysis also suggests that liberal income security programs may have constitutional or quasi-constitutional status because of the nature of the long-term nature of the insurance contract.

Keywords: Social Insurance, Agency Problems, Exit, Averse Selection, Welfare State

JEL Classification: H4, D6, P5