Working Paper 547

Social Insurance and Transition

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
Andrew Atkeson | Consultant

Published April 1, 1995

Abstract
We study the general equilibrium effects of social insurance on the transition in a model in which the process of moving workers from matches in the state sector to new matches in the private sector takes time and involves uncertainty. As to be expected, adding social insurance to an economy without any improves welfare. Contrary to standard intuition, however, adding social insurance may slow transition. We show that this result depends crucially on general equilibrium interactions of interest rates and savings under alternative market structures.


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