Loss of Welfare of a Top up Insurance System∗

The design of social insurance is modelled through majority voting. Individuals, risking the loss of income, vote sequentially on the type of benefits, flat v. proportional, as well as the level of social insurance benefits. The effects of allowing social insurance to be topped up in the private market are then examined. As expected, the existence of an actuarially fair insurance alternative decreases the support for social insurance. In addition, it increases the support for a proportional benefit in detrainment to the flat social benefit. A flat social benefit is thus less ∗This work was started during my stays at CORE and IDEI. I am indebted to Claude d’Aspremont, Helmuth Cremer, François Maniquet, Jean Hindriks, and Pierre Pestieau, for their careful reading and for their many useful suggestions. I am also grateful to Agust́ın Pérez-Barahona, Johannes Binswanger, Marisa Miraldo, and Eric Strobl for their helpful comments and interesting discussions. Also the participants of WRIEC, WEHIA, EHEW and at internal workshops at CORE and IDEI during 2005 for their most helpful comments. Financial support from Fundação para a Ciência e Tecnologia, Ministério para a Ciência e Tecnologia, Quadro Comunitário de Apoio III is gratefully acknowledged. †Universidad de Alicante. Departamento de Fundamentos del Análisis Económico. Campus de San Vicente, 03080 Alicante, Spain. +34 965 90 34 00 (ext 3259). E-mail: [email protected]