Optimal social insurance with linear income taxation

Lans Bovenberg, Peter Birch Sørensen

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Abstract

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.
OriginalsprogEngelsk
TidsskriftScandinavian Journal of Economics
Vol/bind111
Udgave nummer2
Sider (fra-til)251-275
Antal sider25
ISSN0347-0520
DOI
StatusUdgivet - 2009

Bibliografisk note

JEL classification: H21, H55

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