Governmental Transfers Can Reduce a Moral Hazard Problem

Abstract

An altruistic agent who may aid a person with a low income may cause that person to exert little effort to increase his income. Such behavior generates a Dilemma, in which welfare is lower than when no one is altruistic. We show how governmental transfers, which do not allow for reallocation from a person who saves much to one who saves little, reduces the effect, and can lead to an outcome which is Pareto-superior to the outcome under a Nash equilibrium with no government taxation and transfers.Social security; Moral hazard; Savings; Altruism