Transfers, Social Safety Nets, and Economic Growth

April 1, 1996

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Xavier Sala-i-Martin. Transfers, Social Safety Nets, and Economic Growth, (USA: International Monetary Fund, 1996) accessed November 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyses the role of social safety nets in the form of redistributional transfers and wage subsidies. It is argued that public welfare programs can be viewed as a crime-preventing or disruption-preventing devices because they tend to increase the opportunity cost of engaging in crime or disruptive activities. It is shown that, in the presence of a leisure choice, wage subsidies may be better than pure transfers. Using a simple growth model, the optimal size of the public welfare program is found and it is argued that public welfare should be financed with income (not lump-sum) taxes, despite the fact that income taxes are distortionary. The intuition for this result is that income taxes act as a user fee on congested public goods and transfers can be thought of as productive public goods subject to congestion. Finally, using a cross-section of 75 countries, the partial correlation between transfers and growth is shown to be significantly positive.

Subject: Consumption, Crime, Employment subsidies, Income inequality, Labor, National accounts, Personal income

Keywords: Aggregate income, Amount of crime, Consumption, Crime problem, Crime-preventing device, Crime-reducing device, Crime-reduction device, Crimes people, Criminal activity, Economic Growth, Employment subsidies, Europe, Government budget constraint, Income inequality, North America, Northern Europe, Personal income, Productive Public Spending, Public Welfare, Social Safety Nets, Substitution effect, Transfers, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1996/040
Stock No:

WPIEA0401996
ISBN:

9781451845921
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 44, No. 1, March 1997.

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