Politically sustainable social insurance

Private information underpins a basic social trade-off between incentives and inequality. Normative models of dynamic incentive provision explore the optimal evolution of this trade-off. Many prescribe relentlessly increasing levels of inequality. Indeed, under a variety of standard preference assumptions, an immiseration result obtains: a privileged measure zero set of agents obtain all resources in the economy, while the rest converge to the minimal possible utility level. The immiseration result makes the political viability of such optima doubtful.1 Surely, a society could not realistically commit to implementing an allocation that consigns almost all agents to eventual misery? Surely, the immiserated would resist? This paper confronts these questions. We augment the well known normative model of Atkeson and Lucas Of course, similar issues occur in Ramsey models in which agents are identical and the government is restricted to using linear tax mechanisms. The immiseration result gives them extra force in the current setting.