Discussion Paper Details

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Title: Public and Private Insurance with Costly Transactions

Author(s): Giuseppe Bertola and Winfried Koeniger

Publication Date: October 2010

Keyword(s): First-order approach., Moral hazard and Redistribution

Programme Area(s): Labour Economics and Public Economics

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.

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Bibliographic Reference

Bertola, G and Koeniger, W. 2010. 'Public and Private Insurance with Costly Transactions'. London, Centre for Economic Policy Research.