Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 377: The Effectiveness of Government Debt and Transfers as Insurance

Martin Floden ()
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Martin Floden: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: Government debt and redistributive taxation can help people to smooth consumption when facing uninsurable individual specific risk. I examine the effects that variations in public debt and transfers have on risk sharing, efficiency, and the distribution of resources. I find that risk sharing can be improved significantly by both debt and transfers, but that debt has adverse effects on equity. When used in isolation, debt will enhance welfare if transfers are lower than optimal. However, the beneficial effects of public debt vanish if transfers are used optimally.

Keywords: redistributive taxation; public debt; idiosyncratic risk; fiscal policy; social insurance; welfare measures

JEL-codes: E21; E62; H21; H60

36 pages, March 15, 2000

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