SOCIAL INSURANCE, MAJORITY VOTING AND LABOR MOBILITY

This paper presents a political economy approach to payroll tax compet ition between two countries choosing their respective systems of socia l insurance in a context of labor mobility. It considers a class of so cial insurance systems which includes two interesting polar cases: one where benefits are linked to contributions (Bismarck) and one where b enefits are flat (Beveridge). The type of social insurance is chosen ' 'behind the veil of ignorance'' at a first (constitutional) stage. In the second stage, the generosity of social insurance as measured by th e payroll tax rate, is chosen by the majority, given that some have th e possibility to move. The main results are as follows. First, the typ e of mobility (namely poor vs. rich) has a significant impact on the ( second-stage) tax competition/migration equilibrium. Second, more Bism arckian systems are not necessarily more tax competition proof. Third, the process will result in social insurance systems with a stronger t han optimal link between earnings and benefits; put differently, at th e constitutional stage the countries will tend to adopt systems which are ''too Bismarckian''. (C) 1998 Elsevier Science S.A.