Revisiting the relationship between welfare spending and income inequality in OECD countries

d'Agostino, Giorgio and Pieroni, Luca and Procidano, Isabella (2016): Revisiting the relationship between welfare spending and income inequality in OECD countries.

Abstract

The present paper estimates the effects of welfare interventions on income inequality. We propose a theoretical model showing that welfare policies follow the median voter constituency regardless of whether governments are center-left or center-right in the majority electoral system, whereas large differences exist between center-left and center- right coalitions in the proportional representation system. We exploit these differences in the mechanisms of welfare expenditure to estimate their elasticities on income inequality and find that a 1% increase in government spending reduces the Gini income index by half a percentage point. This result is robust under different compositions of expenditure, alternative imputation model specifications and falsification tests.

• Item Type: MPRA Paper
• Language: English
• Keywords: Welfare policies; Electoral rules; Income inequality; Instrumental variable approach; OECD countries
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C26 - Instrumental Variables (IV) Estimation; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies; H - Public Economics > H5 - National Government Expenditures and Related Policies > H53 - Government Expenditures and Welfare Programs

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