Social insurance, majority voting and labor mobility

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