Optimal Taxes and Transfersunder Partial Information

Until 2004, German long-term unemployed received a tax-financed benefit (Arbeitslosenhilfe)which exceeded social assistance for the disabled (Sozialhilfe). This has beenchanged by the recent reform known as “Hartz IV”: Effective from 2005, long-termunemployed on the one hand (who are no more entitled to unemployment insurance)and the disabled on the other hand receive one and the same benefit, i.e. 345 Euro incash plus accommodation and heating. During the reform debate, it was also suggestedto reduce unemployment benefits below the level of social assistance.[...]