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Optimal Social Insurance with Linear Income Taxation

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  • Lans Bovenberg
  • Peter Birch Sørensen

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.

Suggested Citation

  • Lans Bovenberg & Peter Birch Sørensen, 2009. "Optimal Social Insurance with Linear Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(2), pages 251-275, June.
    • Handle: RePEc:bla:scandj:v:111:y:2009:i:2:p:251-275
    DOI: 10.1111/j.1467-9442.2009.01563.x
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    References listed on IDEAS

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    Cited by:

    1. Tsaur-Chin Michael Wu & Chih-Ta Yen & Che-Chiang Huang & Jin-Li Hu, 2023. "Social Insurance Under Fraud And Redistributive Taxation," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 68(02), pages 467-483.

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