Policy-Oriented Parties and the Choice between Social and Private Insurance

CORE Discussion Paper No. 2003/64

21 Pages Posted: 21 Jun 2007

See all articles by Philippe De Donder

Philippe De Donder

University of Toulouse 1 - Toulouse School of Economics (TSE)

Jean Hindriks

University of London - School of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2003

Abstract

We study the political economy of social insurance in a world where individuals differ in both income and risk. Social insurance is financed through distortionary taxation and redistributes across income and risk. Individuals vote on social insurance which they can complement with insurance bought on the private market. Private insurance is actuarially fair but suffers from adverse selection which results in a screening equilibrium with partial coverage. The equilibrium social insurance is the result of bi-partisan electoral competition game where parties maximize the utility of their members. We calculate the equilibrium social insurance offered by the two parties as well as their equilibrium membership, and study how the equilibrium outcome is affected by electoral uncertainty, distortions from taxation, risk aversion and the distribution of risk and income. We then calibrate the model to US data from the PSID survey. Lastly, we study how the political demand for social insurance is affected by the possibility to redistribute through income taxation.

Keywords: political economy, social insurance, redistribution, adverse selection

JEL Classification: H23, H50

Suggested Citation

De Donder, Philippe and Hindriks, Jean, Policy-Oriented Parties and the Choice between Social and Private Insurance (September 1, 2003). CORE Discussion Paper No. 2003/64, Available at SSRN: https://ssrn.com/abstract=995723 or http://dx.doi.org/10.2139/ssrn.995723

Philippe De Donder (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Jean Hindriks

University of London - School of Economics and Finance ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7882 7807 (Phone)
+44 20 8983 3580 (Fax)

HOME PAGE: http://www.dc.eclipse.co.uk/hindriks.html

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