Equity and Efficiency of Childcare Subsidies: A Dynamic Structural Approach

David Koll, Dominik Sachs, Fabian Stürmer-Heiber and Hélène Turon

No 10793, CESifo Working Paper Series from CESifo

Abstract: We formalize and estimate the dynamic marginal efficiency cost of redistribution (MECR) in the spirit of Okun’s “leaky bucket”. We analyze the MECR of an income-contingent childcare subsidy program and the income tax within the German context, using a dynamic structural heterogeneous-household model of childcare demand and maternal labor supply. This allows us to compare which of these two policies is more efficient in achieving redistributive goals. Our analysis identifies two competing forces. (i) Labor supply responses increase the MECR of the childcare subsidy relative to the income tax. (ii) Child development effects decrease the MECR of the childcare subsidy relative to the income tax. For reasonably large Pareto weights on children, we find that (ii) dominates (i) and therefore the childcare subsidy is the more efficient redistribution tool.

Keywords: female labor supply; childcare; family policies; fiscal externalities; dynamic discrete choice; redistribution (search for similar items in EconPapers)
JEL-codes: H23 H31 J13 J22 J24 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-dem, nep-lma and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10793

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