A THEORY OF THE WELFARE-STATE

The welfare stare can be seen as an insurance device that makes lifeti me careers safer, increases risk taking and suffers from moral hazard effects. Adopting this view, the paper studies the trade-off between a verage income and inequality, evaluating redistributive equilibria fro m an allocative point of view. It examines the problem of optimal redi stributive taxation with tax-induced risk taking and shows that consta nt returns to risk taking are likely to imply a paradox where more red istribution results in more post-tax inequality. In general, optimal t axation will imply either that the redistribution paradox is present o r that the economy operates at a point of its efficiency frontier wher e more inequality implies a lower average income.