DP8062 Public and Private Insurance with Costly Transactions

Author(s): Giuseppe Bertola, Winfried Koeniger
Publication Date: October 2010
Keyword(s): First-order approach., Moral hazard, Redistribution
JEL(s): E21, G22, H31
Programme Areas: Labour Economics, Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8062

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.