Social Insurance under Fraud and Redistributive Taxation

Abstract

This paper examines the equity and efficiency effects of social insurance in the presence of insurance fraud and linear income taxes and shows the following findings. (i) Under the commonly accepted assumption of decreasing absolute risk aversion (DARA), the social insurance benefit may increase insurance fraud, whereas raising the marginal tax rate (lumpsum transfer) of the linear income tax also causes insurance fraud to increase (decrease). (ii) Equity and efficiency effects of social insurance are conflicting rather than complementary with each other.