Quantifying Okun’s Leaky Bucket: The Case of Progressive Childcare Subsidies

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

No 11196, 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” to compare the MECR of an income-contingent childcare subsidy program and of the income-contingent tax and transfer schedule. We set up a dynamic structural model of heterogeneous households choosing their childcare demand and maternal labor supply. Allowing for the availability of informal childcare and for consumption of leisure, we estimate this model within the German context. Our analysis identifies two competing forces. (i) Labor supply responses increase the MECR of the childcare subsidy relative to the tax and transfer system. (ii) Child development effects decrease the MECR of the childcare subsidy relative to the income tax. We show that, under most plausible assumptions on the long-term returns to childcare attendance for children growing up in households of different incomes, progressive childcare subsidies are 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: 2024
New Economics Papers: this item is included in nep-dem, nep-lma and nep-pbe
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Working Paper: Quantifying Okun’s Leaky Bucket: The Case of Progressive Childcare Subsidies (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11196

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