Constitutional Political Economy

, Volume 18, Issue 3, pp 145–159 | Cite as

On the Feasibility of a Liberal Welfare State: Agency and Exit Costs in Income Security Clubs

Original Article

Abstract

This paper investigates whether individuals might voluntarily join and remain members of a state in which high levels of social insurance are provided. That is to say, are there plausible circumstances in which a social welfare state can be regarded as “liberal” in the sense that it has the universal support of its citizens?

As a point of departure, the paper demonstrates that risk-averse individuals in a setting of substantial income or health uncertainty will voluntarily join private income-security clubs. Private income-security clubs, however, cannot be entirely voluntary because they must solve the problem of adverse selection, as with entry or exit fees. The paper demonstrates that individuals may opt for governmental provision of income security services, when there is uncertainty about the quality of private club services, because naturally high exit costs allow national governments to economically address the problem of adverse selection. The analysis also suggests that liberal income security programs may have constitutional or quasi-constitutional status because of the nature of the long-term nature of the insurance contract.

Keywords

Social Insurance Agency Problems Exit Averse Selection Welfare State Social Security Public Choice Constitutional Economics Liberalism 

JEL Classification

H4 D6 P5 

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Copyright information

© Springer Science + Business Media, LLC 2007

Authors and Affiliations

  1. 1.Center for Study of Public ChoiceGeorge Mason UniversityFairfaxUSA

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