The supply of social insurance in historical perspective

Résumé

We argue that the rise of the welfare state throughout the Western economies can be understood as the self-interested response of the wealthy to increasing social demands. Our thesis is that the Great Depression led to a permanent increase in people's perception of aggregate economic risks, and that social insurance was supplied as part of a risk-sharing contract to avoid social conflict. We propose that the rise of the modern welfare state was a process of exploitation of effciency gains associated with the proliferation of social insurance programs that targeted heterogenous risks. Our theory also offers a novel explanation for why the growth in social transfers coincided initially with a sharp increase in tax progressivity and then a gradual decrease in progressivity. The underlying mechanism is that the wealthy use their political influence to bring about a combination of redistribution and insurance that minimizes their cost without triggering social conflict.