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International Tax and Public Finance

, Volume 11, Issue 3, pp 313–331 | Cite as

The Welfare State in a Changing Environment

  • Thomas Eichner
  • Andreas Wagener
Article

Abstract

We analyse how the welfare state, i.e., social insurance that works through redistributive taxation, should respond to increases in risks and to increases in the cost of operating the welfare state. With respect to risks, we distinguish between risks that can be insured and such that cannot (background risks). Insurable risks can be reduced by costly individual self-insurance and by costly social insurance. We show: (i) Self-insurance will be higher the more costly is the welfare state and the larger are background or insured risks. (ii) Full social insurance can only be optimal in a costless welfare state. (iii) The optimal welfare state is not necessarily larger the less costly it is. (iv) The welfare state need not optimally expand when risks increase that it insures. (v) It should, however, expand when risks increase that it does not insure.

welfare state social insurance welfare cost background risks 

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Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  • Thomas Eichner
    • 1
  • Andreas Wagener
    • 2
  1. 1.VWL IVUniversity of SiegenSiegenGermany
  2. 2.Department of EconomicsUniversity of ViennaViennaAustria

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