Working Paper: CEPR ID: DP8062
Authors: Giuseppe Bertola; Winfried Koeniger
Abstract: We characterize how public insurance schemes are constrained by hidden financial transactions. When non-exclusive private insurance entails increasing unit transaction costs, public transfers are only partly offset by hidden private transactions, and can influence consumption allocation. We show that efficient transfer schemes should take into account the impact of insurance on unobservable effort and saving choices as well as the relative cost of public and private insurance technologies. We provide suggestive evidence for the empirical relevance of these results by inspecting the cross-country relationship between available indicators of insurance transaction costs and variation in public and private insurance.
Keywords: first-order approach; moral hazard; redistribution
JEL Codes: E21; G22; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public transfers (H49) | Consumption allocation (E21) |
| Hidden private transactions (Y50) | Consumption allocation (E21) |
| Public transfers (H49) | Hidden private transactions (Y50) |
| Transaction costs (D23) | Efficiency of public insurance schemes (H55) |
| Transaction costs (D23) | Public transfers (H49) |