Welfare State - The Scandinavian Model

The Scandinavian countries have achieved both a high level of living standard (measured by e.g. average income) and an egalitarian outcome (measured by e.g. income inequality) despite a very large public sector and thus a large tax burden (about 50 % of GDP). The Scandinavian cluster thus poses a challenge to the standard view on the tradeoff between efficiency and equity. How come that the Scandinavian countries have been able to achieve high equality without much sacrifice of efficiency in terms of income? This paper addresses this question with the outset in recent work stressing the insurance aspect of the welfare state. A broad interpretation of the Scandinavian welfare model in terms of social insurance or common pool aspects is given. The effects of social insurance are discussed and the potential incentive problems arising in a common pool arrangement are argued to be mitigated by a number of counteracting mechanisms. Issues in policy design and the political economy of the welfare state are also discussed.