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Policy-oriented Parties and the Choice Between Social and Private Insurance

Author

Listed:
  • Hindricks, Jean
  • De Donder, Philippe
Abstract
We study the political economy of social insurance in a world where individuals differ in both income and risk. Social insurance is financed through distortionary taxation and redistributes across income and risk. Individuals vote on social insurance that they can complement with insurance bought on the private market. Private insurance is actuarially fair but suffers from adverse selection, which results in a screening equilibrium with partial coverage. The equilibrium social insurance is the result of an electoral competition game where parties maximize the utility of their members. We calculate the equilibrium social insurance offered by the two parties as well as their equilibrium membership, and study how the equilibrium outcome is affected by electoral uncertainty, distortions from taxation, risk aversion and the distribution of risk and income. We then calibrate the model to US data from the PSID survey. Lastly, we study how the political demand for social insurance is affected by the possibility to redistribute through income taxation.

Suggested Citation

  • Hindricks, Jean & De Donder, Philippe, 2005. "Policy-oriented Parties and the Choice Between Social and Private Insurance," CEPR Discussion Papers 4864, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4864
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    References listed on IDEAS

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    1. Petretto, Alessandro, 1999. "Optimal social health insurance with supplementary private insurance," Journal of Health Economics, Elsevier, vol. 18(6), pages 727-745, December.
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    More about this item

    Keywords

    Political economy; Social insurance; Redistribution; 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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