A Pareto Efficiency Rationale for the Welfare State

Stefan Napel

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: Can fiscal policy raise utility for all in dynamic economies with unobservable agent heterogeneity, when missing credit and insurance markets affect incentives to invest in human capital? If so, should the state provide transfers to the poor in the form of cash or in kind? In an occupational choice model, we show (a) every competitive equilib- rium is interim-Pareto dominated by a policy providing education subsidies financed by income taxes, and (b) transfers conditional on educational investments similarly dom- inate unconditional transfers. The policies also result in macroeconomic improvements (higher per capita income and upward mobility, lower wage dispersion).

JEL-codes: C72 C73 D82 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-ias and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100496

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