Optimal social insurance with linear income taxation

A.L. Bovenberg, P.B. Sorensen

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
Pages (from-to)251-275
JournalThe Scandinavian Journal of Economics
Volume111
Issue number2
Publication statusPublished - 2009

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