Social Transfers and Spatial Distortions

Mark Colas and Robert McDonough

Journal of Labor Economics, 2025, vol. 43, issue 1, 161 - 201

Abstract: US social transfer programs vary substantially across states, incentivizing households to locate in states with more generous transfer programs. Furthermore, transfer formulas often decrease in income, thereby 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 United States. The current system leads to locational inefficiency of 4.88% 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 more than 60% while preserving the programs’ means-tested nature.

Date: 2025
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