Social Insurance and Redistribution with Moral Hazard and Adverse Selection

Abstract

This Paper starts from the result of Rochet (1989), that with distortionary income taxes social insurance is a desirable redistributive device when risk and ability are negatively correlated. This finding is re-examined when ex-post moral hazard and adverse selection are included, and under different informational assumptions. Individuals can take actions influencing the size of the loss in the event of accident (or ill health). Social insurance can be supplemented by private insurance, but private insurance markets are affected by both adverse selection and moral hazard. The main purpose of the present Paper is to study how equity and efficiency considerations should be traded off in choosing the optimal coverage of social insurance when those features are introduced.

Keywords: Social insurance, redistribution, market failures

JEL Classification: H23, H51