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Social Insurance and Redistribution with Moral Hazard and Adverse Selection *
Author(s) -
Boadway Robin,
LeiteMonteiro Manuel,
Marchand Maurice,
Pestieau Pierre
Publication year - 2006
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2006.00446.x
Subject(s) - moral hazard , adverse selection , morale hazard , group insurance , social insurance , actuarial science , key person insurance , economics , redistribution (election) , equity (law) , casualty insurance , auto insurance risk selection , insurance policy , general insurance , public economics , income protection insurance , microeconomics , incentive , market economy , politics , political science , law
Rochet (1991) showed that with distortionary income taxes, social insurance is a desirable redistributive device when risk and ability are negatively correlated. This finding is re‐examined when ex post moral hazard and adverse selection are included, and under different informational assumptions. Individuals can take actions influencing the size of the loss in the event of accident (or ill health). Social insurance can be supplemented by private insurance, but private insurance markets are affected by both adverse selection and moral hazard. We study how equity and efficiency considerations should be traded off in choosing the optimal coverage of social insurance when those features are introduced. The case for social insurance is strongest when the government is well informed about household productivity.