Individuals face uncertainty about their labour income, due to chronic and temporary medical conditions or to unemployment spells. The individual burden of these risks can be eased by social insurance. Income taxation and government transfer programmes, such as disability and unemployment insurance, are the most common forms of social insurance. The challenge in the design of social insurance programmes is the impossibility of fully distinguishing between low income by choice and low income by necessity. This article reviews leading theories of optimal social insurance under private information and points to possible directions of future research.
KeywordsAdverse selection Altruism Consumption inequality Consumption smoothing Continuation values Depreciation Disability insurance Euler equations Expected utility Human capital Immizeration Incentive compatibility Incentives Infinite horizons Lump-sum taxes Mirrlees, J. Moral hazard Observability Optimal taxation Principal and agent Private information Private insurance Progressive and regressive taxation Promised values Risk sharing Search models of unemployment Self-insurance Social insurance Taxation of capital income Taxation of income Training Unemployment insurance Welfare-to-work programmes
I wish to thank Claudia Olivetti, Nicola Pavoni and Bruce Preston for very helpful comments and discussion.
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