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The Welfare State in a Changing Environment

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  • Thomas Eichner
  • Andreas Wagener

Abstract

We analyse how the welfare state, i.e., social insurance that works through redistributive taxation, should respond to increases in risks and to increases in the cost of operating the welfare state. With respect to risks, we distinguish between risks that can be insured and such that cannot (background risks). Insurable risks can be reduced by costly individual self-insurance and by costly social insurance. We show: (i) Self-insurance will be higher the more costly is the welfare state and the larger are background or insured risks. (ii) Full social insurance can only be optimal in a costless welfare state. (iii) The optimal welfare state is not necessarily larger the less costly it is. (iv) The welfare state need not optimally expand when risks increase that it insures. (v) It should, however, expand when risks increase that it does not insure.

Suggested Citation

  • Thomas Eichner & Andreas Wagener, 2004. "The Welfare State in a Changing Environment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(3), pages 313-331, May.
    • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:3:p:313-331
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    References listed on IDEAS

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    Cited by:

    1. Thomas Eichner, 2013. "Increases in skewness and insurance," Economics Bulletin, AccessEcon, vol. 33(4), pages 2672-2681.
    2. Weinreich, Daniel, 2013. "Does a work effort norm lead to more efficient taxation in majority voting?," MPRA Paper 48913, University Library of Munich, Germany.
    3. Thomas Eichner & Daniel Weinreich, 2015. "Welfare stigma and risk taking in the welfare state," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 44(2), pages 319-348, February.
    4. Ortega, Eva-María & Escudero, Laureano F., 2010. "On expected utility for financial insurance portfolios with stochastic dependencies," European Journal of Operational Research, Elsevier, vol. 200(1), pages 181-186, January.
    5. Weinreich, Daniel, 2013. "The perception of distributive fairness and optimal taxation under uncertainty," MPRA Paper 48912, University Library of Munich, Germany.

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