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Optimal Social Insurance with Linear Income Taxation *
Author(s) -
Bovenberg Lans,
Birch Sørensen Peter
Publication year - 2009
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.1467-9442.2009.01563.x
Subject(s) - disability insurance , economics , earnings , moral hazard , imperfect , social insurance , income protection insurance , disability benefits , social security , insurance policy , self insurance , labour economics , casualty insurance , actuarial science , general insurance , microeconomics , incentive , health insurance , finance , health care , linguistics , philosophy , market economy , economic growth
We study optimal social insurance aimed at insuring disability risk in the presence of linear income taxation. Optimal disability insurance benefits rise with previous earnings. Optimal insurance is incomplete even though disability risks are exogenous and verifiable so that moral hazard in disability insurance is absent. Imperfect insurance is optimal because it encourages workers to insure themselves against disability by working and saving more, thereby alleviating the distortionary impact of the redistributive income tax on labor supply and savings.