Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 654: Idiosyncratic Risk in the U.S. and Sweden: Is there a Role for Government Insurance?

Martin Flodén () and Jesper Linde ()
Additional contact information
Martin Flodén: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Jesper Linde: Handelshögskolan

Abstract: We examine the effects of government redistribution schemes in an economy where agents are subject to uninsurable, individual specific productivity risk. In particular, we consider the trade-off between positive insurance effects and negative distortions on labor supply. We parameterize the model by estimating productivity processe on Swedish and U.S. data. The estimation results show that agents in the U.S. are subject to more idiosynchratic risk than agents in sweden. Distortions are significant but agents, particularly in the U.S., still like some government insurance. As a result of this exercice, we can construct Laffer curves for both countries. These peak when labor income tax rates are around 60 percent.

Keywords: Idiosyncratic Risk; Inequality; Insurance; Redistribution; Laffer Curve; Distributions

JEL-codes: E20; H21

36 pages, September 1, 1998

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