Credible Social Insurance

This paper considers the credibility of social insurance arrangements in a dynamic moral hazard economy. A utilitarian planner selects an allocation for agents who experience privately observed taste shocks. When the planner can commit the optimal allocation exhibits an "immiseration" property: with probability 1 an agent's continuation utility will drift downwards to its minimal level. Thus, the ex ante optimal provision of incentives implies severe ex post inequality and is time inconsistent. When the planner can not commit, the best, credible outcome is very different. Ex post consumption and utility allocations are much less dispersed. Thus, a lack of planner commitment is a force for ex post equality.