Public versus Private Insurance with Non-Expected Utility: A Political Economy Argument

This paper analyzes the political support for public insurance in the presence of a private insurance alternative. The public insurance is compulsory and offers a uniform insurance policy. The private insurance is voluntary and can offer different insurance policies. Adopting Yaari's (1987) dual theory to expected utility (i.e., risk aversion without diminishing marginal utility of income), we show that adverse selection on the private insurance market may lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below the average risk (so that the median actually subsidizes high-risk individuals). We also show that risk aversion makes public insurance more attractive and that the dual theory is less favourable to a mixed insurance system than the expected utility framework. Lastly, we demonstrate how the use of genetic tests may threaten the political viability of public insurance.Voting, Insurance, Adverse selection

Decentralization and Electoral Accountability: Incentives, Separation, and Voter Welfare

This paper studies the relationship between fiscal decentralization and electoral accountability, by analyzing how decentralization impacts upon incentive and selection effects, and thus on voter welfare. The effect of fiscal centralization on voter welfare works through two channels: (i) via its effect on the probability of pooling by the bad incumbent; (ii) conditional on the probability of pooling, the extent to which, with centralization, the incumbent can divert rents in some regions without this being detected by voters in other regions (selective rent diversion). Both these effects depend on the information structure; whether voters only observe fiscal policy in their own region, in all regions, or an intermediate case with a uniform tax across all regions. More voter information does not necessarily raise voter welfare, and under some conditions, voter would choose uniform over differentiated taxes ex ante to constrain selective rent diversion.fiscal federalism; decentralization; elections; accountability

Matching Grants and Ricardian Equivalence

This paper questions the effectiveness of matching grants to correct for interjurisdictional spillovers in the light of Bernheim general neutrality result. Indeed this result suggests that the usual argument that matching grants are needed to internalize the externality arising from the existence of interjuridictional spillovers is an artifact of the assumption that jurisdictions neglect the impact that their decisions have on the federal budget. Relaxing this assumption and using a classical model where the arbitrage resulting from labor mobility implies that redistribution has the properties of a public good, we find that matching grants are relevant although much less effective. We also find that optimal matching rates are independent of the jurisdictions' choice of policy variable contrarily to the case where jurisdictions ignore the impact of their decisions on the federal budget.Fiscal federalism, Ricardian equivalence, Matching grants

Free Riding on Altruism and Group Size

It is shown that altruism does not affect the equilibrium provision of public goods although altruism takes the form of unconditional commitment to contribute. The reason is that altruistic contributions completely crowd out selfish contributions. That is, egoists free ride on altruism. It is also shown that public goods are less likely to be provided in larger groups.Free Riding, Public good, Altruism

Decentralization and Electoral Accountability : Incentives, Separation and Vote Welfare

This paper studies the relationship between fiscal decentralization and electoral accountability, by analyzing how decentralization impacts upon incentive and selecion effects, and thus on voter welfare. The model abstracts from features such as public good spillovers or economics of scale, so that absent elections, voters are indifferent about the fiscal regime. The effect of fiscal centralization on voter welfare works through two channels : (i) via its effect on the probability of pooling by the bad incumbent; (ii) conditional on the probability of pooling, the extent to which, with centralization, the incumbent can divert rents in some regions without this being detected by voters in other regions (selective rent diversion). Both these effects depend on the information structure; whether voters only observe fiscal policy in their own region, in all regions, or an intermediate case with a uniform tax across all regions. More voter information does not necessarily raise voter welfare, and under some conditions, voter would choose uniform over differentiated taxes ex ante to constrain selective rent diversionFiscal federalism; decentralization; elections; accountability

Strategic Privatization and Regulation Policy in Mixed Markets

In this paper we consider mixed oligopoly markets for differentiated goods where private and public firms compete either in prices or quantities. We then study the welfare effect of privatization interpreted as partial strategic delegation of the public firm to a private manager with profit concern. It is shown that partial privatization improves welfare with quantity competion when goods are subsitutes, and with price competition when goods are complements. However full privatization (complete delegation to private manager) can never be optimal. It is also shown that the public firm can make more profit than the private firm in equilibrium, and that this possibility is more likely under quantity competition. Turning to market regulation policy, we find : (i) that public and private firms should be taxed the same; and (ii) that price regulation is better than quantity regulation.

Yardstick Competition and Political Agency Problems

This paper analyzes the role of yardstick competition for improving political decisions. We examine how performance comparisons across jurisdictions affect the agency problem resulting from uncertainty about politicians (adverse selection) and their policies (moral hazard). We study two forms of inefficiency: the provision of non-valuable programmes (over-provision) and the failure to provide valuable programmes (under-provision). We find a general neutrality result: yardstick competition does not affect the chance that at least one type of politician in one jurisdiction will take inefficient decision, nor does it affect the risk of underproviding good programmes. However, performance comparisons reduce the risk of providing bad programmes in both jurisdictions.Electoral competition, Yardstick competition

Equilibrium Social Insurance with Policy-Motivated Parties

We study the political economy of social insurance with double heterogeneity of voters (i.e., different income and risk levels). Social insurance is financed through distortionary taxation and redistributes across income and risks. Individuals vote over the extent of social insurance, which they can complement on the private market. Private insurance suffers from adverse selection which results into insurance rationing. We model political competition a la Wittman, with two parties maximizing the utility of their members. Party membership is endogenously determined. We show that although individuals differ in two dimensions, their preference for social insurance can be aggregated into a single dimensional type function. We then resort to numerical simulations to solve the political equilibrium resort to numerical simulations to solve the political equilibrium outcome as a function of the distribution of income and risk. We obtain equilibrium policy differentiation with the Left party proposing more social insurance than the Right party. The Left party’s equilibrium membership is made of low risk and high income individuals, with high risk and low income individuals forming the Right party’s constituency. In equilibrium, each party is tying for winning. Unlike the median voter outcome, our equilibrium outcome depends on the whole income and risks distribution, and increasing income polarization leads both parties to propose less social insurance. We also compare the political equilibrium outcome with the Rawlsian and utilitarian outcomes.electoral competition, endogenous parties, Wittman equilibrium, social insurance, adverse selection