Optimal social insurance with linear income taxation

TY - JOUR

T1 - Optimal social insurance with linear income taxation

AU - Bovenberg, Lans

AU - Sørensen, Peter Birch

N1 - JEL classification: H21, H55

PY - 2009

Y1 - 2009

N2 - 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.

AB - 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.

KW - Faculty of Social Sciences

KW - disability insurance

KW - optimal taxation

KW - moral hazard

KW - redistribution

KW - labor supply

KW - skill groups

U2 - 10.1111/j.1467-9442.2009.01563.x

DO - 10.1111/j.1467-9442.2009.01563.x

M3 - Journal article

SN - 0347-0520

VL - 111

SP - 251

EP - 275

JO - Scandinavian Journal of Economics

JF - Scandinavian Journal of Economics

IS - 2

ER -