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Equilibrium Social Insurance with Policy-Motivated Parties

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  • Philippe, DE DONDER
  • Jean, HINDRIKS

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

Abstract

We study the political economy of social insurance with double heterogeneity of voters (i.e., different income and risk levels). Social insurance is financed through distortionary taxation and redistributes across income and risks. Individuals vote over the extent of social insurance, which they can complement on the private market. Private insurance suffers from adverse selection which results into insurance rationing. We model political competition a la Wittman, with two parties maximizing the utility of their members. Party membership is endogenously determined. We show that although individuals differ in two dimensions, their preference for social insurance can be aggregated into a single dimensional type function. We then resort to numerical simulations to solve the political equilibrium resort to numerical simulations to solve the political equilibrium outcome as a function of the distribution of income and risk. We obtain equilibrium policy differentiation with the Left party proposing more social insurance than the Right party. The Left party’s equilibrium membership is made of low risk and high income individuals, with high risk and low income individuals forming the Right party’s constituency. In equilibrium, each party is tying for winning. Unlike the median voter outcome, our equilibrium outcome depends on the whole income and risks distribution, and increasing income polarization leads both parties to propose less social insurance. We also compare the political equilibrium outcome with the Rawlsian and utilitarian outcomes.

Suggested Citation

  • Philippe, DE DONDER & Jean, HINDRIKS, 2006. "Equilibrium Social Insurance with Policy-Motivated Parties," Discussion Papers (ECON - Département des Sciences Economiques) 2006018, Université catholique de Louvain, Département des Sciences Economiques.
  • Handle: RePEc:ctl:louvec:2006018
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    2. Daniel McFadden & Carlos Noton & Pau Olivella, "undated". "Remedies for Sick Insurance," Working Papers 620, Barcelona School of Economics.
    3. Pau Olivella & Fred Schroyen, 2014. "Multidimensional Screening in a Monopolistic Insurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 39(1), pages 90-130, March.
    4. Potrafke, Niklas, 2017. "Partisan politics: The empirical evidence from OECD panel studies," Journal of Comparative Economics, Elsevier, vol. 45(4), pages 712-750.
    5. Niklas Potrafke, 2011. "Does government ideology influence budget composition? Empirical evidence from OECD countries," Economics of Governance, Springer, vol. 12(2), pages 101-134, June.
    6. Becchetti, Leonardo & Conzo, Pierluigi & Salustri, Francesco, 2017. "The impact of health expenditure on the number of chronic diseases," Health Policy, Elsevier, vol. 121(9), pages 955-962.
    7. Llavador, Humberto & Solano-García, Angel, 2011. "Immigration policy with partisan parties," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 134-142, February.
    8. Niklas Potrafke, 2012. "Is German domestic social policy politically controversial?," Public Choice, Springer, vol. 153(3), pages 393-418, December.
    9. Potrafke, Niklas & Roesel, Felix, 2020. "The urban–rural gap in healthcare infrastructure: does government ideology matter?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 54(3), pages 340-351.
    10. Björn Kauder & Manuela Krause & Niklas Potrafke, 2021. "Do Left-wing Governments Decrease Wage Inequality among Civil Servants? Empirical Evidence from the German States," Public Finance Review, , vol. 49(1), pages 106-135, January.
    11. Herwartz, Helmut & Theilen, Bernd, 2017. "Ideology and redistribution through public spending," European Journal of Political Economy, Elsevier, vol. 46(C), pages 74-90.
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    13. Niklas Potrafke, 2012. "Political cycles and economic performance in OECD countries: empirical evidence from 1951–2006," Public Choice, Springer, vol. 150(1), pages 155-179, January.
    14. Baurin, Arno & Hindriks, Jean, 2023. "Intergenerational consequences of gradual pension reforms," European Journal of Political Economy, Elsevier, vol. 78(C).
    15. Christian Bjørnskov & Niklas Potrafke, 2012. "Political Ideology and Economic Freedom Across Canadian Provinces," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 38(2), pages 143-166.
    16. Georges Casamatta & L. Batté, 2016. "The Political Economy of Population Aging," Post-Print hal-02520521, HAL.
    17. Niklas Potrafke, 2010. "Ideology and cultural policy," TWI Research Paper Series 49, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    18. Angel Solano García, 2015. "Tax Morale with Partisan Parties," Hacienda Pública Española / Review of Public Economics, IEF, vol. 213(2), pages 83-108, June.
    19. De Donder, Philippe & Gallego, Maria, 2017. "Electoral Competition and Party Positioning," TSE Working Papers 17-760, Toulouse School of Economics (TSE).
    20. Herwartz, Helmut & Theilen, Bernd, 2014. "Partisan influence on social spending under market integration, fiscal pressure and institutional change," European Journal of Political Economy, Elsevier, vol. 34(C), pages 409-424.
    21. Casamatta, G. & Batté, L., 2016. "The Political Economy of Population Aging," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 381-444, Elsevier.
    22. Helmut Herwartz & Bernd Theilen, 2014. "Health Care And Ideology: A Reconsideration Of Political Determinants Of Public Healthcare Funding In The Oecd," Health Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 225-240, February.

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    More about this item

    Keywords

    electoral competition; endogenous parties; Wittman equilibrium; social insurance; adverse selection;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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