Social Transfers and Spatial Distortions

Mark Colas and Robert McDonough ()
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Robert McDonough: https://economics.uoregon.edu/profile/rmcdono2/

No 54, Opportunity and Inclusive Growth Institute Working Papers from Federal Reserve Bank of Minneapolis

Abstract: US social transfer programs vary substantially across states, incentivizing households to locate in states with more generous transfer programs. Further, transfer formulas often decrease in income, therefore rewarding low-income households for living in low-paying cities. We quantify these distortions by combining a spatial equilibrium model with a detailed model of transfer programs in the US. The current system leads to locational inefficiency of 4.38% of total transfer spending. A reform that both harmonizes transfer policies across states and indexes household income to local average earnings reduces this inefficiency by over 85 percent while still preserving the programs' means-tested nature.

Keywords: Social transfers; Local labor markets; Spatial equilibrium (search for similar items in EconPapers)
JEL-codes: H21 I38 R13 (search for similar items in EconPapers)
Pages: 81
Date: 2021-11-17
New Economics Papers: this item is included in nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmoi:93474

DOI: 10.21034/iwp.54

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