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Incentives versus insurance in the design of tax‐financed unemployment insurance
Author(s) -
Andersen Torben M.
Publication year - 2016
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12085
Subject(s) - economics , incentive , equity (law) , unemployment , point (geometry) , tax incentive , tax rate , microeconomics , labour economics , public economics , monetary economics , macroeconomics , geometry , mathematics , political science , law
The distortions of job‐search incentives caused by unemployment benefits and their financing are well known. However, a benefit‐tax scheme also provides insurance having direct utility effects as well as indirect effects on risk taking. The latter mitigates or may even dominate standard incentive effects to produce a non‐monotone relation between efficiency (incentives) and equity (insurance). An increase in benefits (and thus tax rate) may up to some point increase average income and reduce inequality. However, optimal utilitarian policies always position the economy at a point where marginal policy changes involve a trade‐off, otherwise policies would not be optimal.